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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within HeveaBoard Berhad (KLSE:HEVEA), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on HeveaBoard Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = RM12m ÷ (RM511m - RM74m) (Based on the trailing twelve months to June 2022).
Thus, HeveaBoard Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Forestry industry average of 5.9%.
See our latest analysis for HeveaBoard Berhad
In the above chart we have measured HeveaBoard Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering HeveaBoard Berhad here for free.
What Can We Tell From HeveaBoard Berhad's ROCE Trend?
We are a bit worried about the trend of returns on capital at HeveaBoard Berhad. Unfortunately the returns on capital have diminished from the 21% 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on HeveaBoard Berhad becoming one if things continue as they have.
What We Can Learn From HeveaBoard Berhad's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. This could explain why the stock has sunk a total of 72% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you want to continue researching HeveaBoard Berhad, you might be interested to know about the 2 warning signs that our analysis has discovered.