What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into OKA Corporation Bhd (KLSE:OKA), the trends above didn't look too great.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for OKA Corporation Bhd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = RM5.7m ÷ (RM217m - RM29m) (Based on the trailing twelve months to June 2023).
So, OKA Corporation Bhd has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 3.9%.
See our latest analysis for OKA Corporation Bhd
Historical performance is a great place to start when researching a stock so above you can see the gauge for OKA Corporation Bhd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of OKA Corporation Bhd, check out these free graphs here.
So How Is OKA Corporation Bhd's ROCE Trending?
There is reason to be cautious about OKA Corporation Bhd, given the returns are trending downwards. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect OKA Corporation Bhd to turn into a multi-bagger.
The Bottom Line On OKA Corporation Bhd's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 26% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
If you want to know some of the risks facing OKA Corporation Bhd we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.