Returns On Capital At MPHB Capital Berhad (KLSE:MPHBCAP) Paint A Concerning Picture
What financial metrics can indicate to us that a company is maturing or even 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, MPHB Capital Berhad (KLSE:MPHBCAP) we aren't filled with optimism, but let's investigate further.
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. To calculate this metric for MPHB Capital Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = RM44m ÷ (RM1.8b - RM25m) (Based on the trailing twelve months to March 2023).
Thus, MPHB Capital Berhad has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.8%.
View our latest analysis for MPHB Capital Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how MPHB Capital Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of MPHB Capital Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.8%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect MPHB Capital Berhad to turn into a multi-bagger.
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On a side note, MPHB Capital Berhad has done well to pay down its current liabilities to 1.4% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.