When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Lysaght Galvanized Steel Berhad (KLSE:LYSAGHT), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Lysaght Galvanized Steel Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.05 = RM8.3m ÷ (RM173m - RM6.7m) (Based on the trailing twelve months to September 2022).

Thus, Lysaght Galvanized Steel Berhad has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 11%.

See our latest analysis for Lysaght Galvanized Steel Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lysaght Galvanized Steel Berhad's ROCE against it's prior returns. If you're interested in investigating Lysaght Galvanized Steel Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Lysaght Galvanized Steel Berhad's ROCE Trending?

In terms of Lysaght Galvanized Steel Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Lysaght Galvanized Steel Berhad to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Lysaght Galvanized Steel Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 50% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Lysaght Galvanized Steel Berhad (including 1 which can't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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