If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. So after we looked into LTKM Berhad (KLSE:LTKM), the trends above didn't look too great.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for LTKM Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.014 = RM3.6m ÷ (RM325m - RM67m) (Based on the trailing twelve months to June 2022).
Thus, LTKM Berhad has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.
Check out our latest analysis for LTKM 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 want to delve into the historical earnings, revenue and cash flow of LTKM Berhad, check out these free graphs here.
What Can We Tell From LTKM Berhad's ROCE Trend?
We are a bit worried about the trend of returns on capital at LTKM Berhad. To be more specific, the ROCE was 3.9% 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. If these trends continue, we wouldn't expect LTKM Berhad to turn into a multi-bagger.
The Bottom Line On LTKM Berhad's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 14% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
If you want to know some of the risks facing LTKM Berhad we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.