To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Kumpulan Perangsang Selangor Berhad (KLSE:KPS) we aren't filled with optimism, but let's investigate further.
What Is 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 Kumpulan Perangsang Selangor Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = RM31m ÷ (RM1.9b - RM329m) (Based on the trailing twelve months to June 2024).
So, Kumpulan Perangsang Selangor Berhad has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.7%.
See our latest analysis for Kumpulan Perangsang Selangor Berhad
In the above chart we have measured Kumpulan Perangsang Selangor Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Kumpulan Perangsang Selangor Berhad .
What Does the ROCE Trend For Kumpulan Perangsang Selangor Berhad Tell Us?
There is reason to be cautious about Kumpulan Perangsang Selangor Berhad, given the returns are trending downwards. To be more specific, the ROCE was 3.0% five years ago, but since then it has dropped noticeably. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kumpulan Perangsang Selangor Berhad becoming one if things continue as they have.
Our Take On Kumpulan Perangsang Selangor Berhad's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 31% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.