If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount 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. So after we looked into NTPM Holdings Berhad (KLSE:NTPM), the trends above didn't look too great.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on NTPM Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = RM29m ÷ (RM1.0b - RM444m) (Based on the trailing twelve months to January 2024).
Thus, NTPM Holdings Berhad has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Household Products industry average of 8.3%.
Check out our latest analysis for NTPM Holdings Berhad
Above you can see how the current ROCE for NTPM Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for NTPM Holdings Berhad .
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at NTPM Holdings Berhad. About five years ago, returns on capital were 6.8%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on NTPM Holdings Berhad becoming one if things continue as they have.
On a side note, NTPM Holdings Berhad's current liabilities have increased over the last five years to 44% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.