If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Amara Holdings (SGX:A34), we weren't too hopeful.
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. To calculate this metric for Amara Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = S$13m ÷ (S$811m - S$119m) (Based on the trailing twelve months to June 2022).
Therefore, Amara Holdings has an ROCE of 1.9%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 1.0%.
View our latest analysis for Amara Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Amara Holdings' ROCE against it's prior returns. If you're interested in investigating Amara Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Amara Holdings' ROCE Trending?
We are a bit worried about the trend of returns on capital at Amara Holdings. Unfortunately the returns on capital have diminished from the 2.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Amara Holdings to turn into a multi-bagger.
In Conclusion...
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 35% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Amara Holdings (of which 2 don't sit too well with us!) that you should know about.