When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Can-One Berhad (KLSE:CANONE), so let's see why.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Can-One Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = RM61m ÷ (RM4.3b - RM1.2b) (Based on the trailing twelve months to September 2024).
Therefore, Can-One Berhad has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 8.9%.
Check out our latest analysis for Can-One Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Can-One Berhad's ROCE against it's prior returns. If you're interested in investigating Can-One Berhad's past further, check out this free graph covering Can-One Berhad's past earnings, revenue and cash flow.
What Can We Tell From Can-One Berhad's ROCE Trend?
We are a bit worried about the trend of returns on capital at Can-One Berhad. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Can-One Berhad becoming one if things continue as they have.
In Conclusion...
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 haven't taken kindly to these developments, since the stock has declined 15% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.