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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at UEM Edgenta Berhad (KLSE:EDGENTA), so let's see why.
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. To calculate this metric for UEM Edgenta Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = RM68m ÷ (RM3.0b - RM922m) (Based on the trailing twelve months to June 2023).
So, UEM Edgenta Berhad has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.3%.
View our latest analysis for UEM Edgenta Berhad
In the above chart we have measured UEM Edgenta Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for UEM Edgenta Berhad.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at UEM Edgenta Berhad. About five years ago, returns on capital were 9.1%, 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. 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 UEM Edgenta Berhad becoming one if things continue as they have.
What We Can Learn From UEM Edgenta Berhad's ROCE
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 54% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.