When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Citra Nusa Holdings Berhad (KLSE:CNH), we've spotted some signs that it could be struggling, so let's investigate.
What Is 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 Citra Nusa Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0065 = RM456k ÷ (RM81m - RM10m) (Based on the trailing twelve months to June 2023).
Thus, Citra Nusa Holdings Berhad has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 6.2%.
Check out our latest analysis for Citra Nusa Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Citra Nusa Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Citra Nusa Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Citra Nusa Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.8%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Citra Nusa Holdings Berhad to turn into a multi-bagger.
The Key Takeaway
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to continue researching Citra Nusa Holdings Berhad, you might be interested to know about the 2 warning signs that our analysis has discovered.