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. And from a first read, things don't look too good at Wang-Zheng Berhad (KLSE:WANGZNG), so let's see why.
Return On Capital Employed (ROCE): What Is It?
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 Wang-Zheng Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = RM5.1m ÷ (RM294m - RM89m) (Based on the trailing twelve months to June 2023).
Thus, Wang-Zheng Berhad has an ROCE of 2.5%. On its own, that's a low figure but it's around the 3.0% average generated by the Forestry industry.
See our latest analysis for Wang-Zheng Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Wang-Zheng Berhad's ROCE against it's prior returns. If you're interested in investigating Wang-Zheng Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
There is reason to be cautious about Wang-Zheng Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.4% that they were earning five years ago. 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 Wang-Zheng Berhad to turn into a multi-bagger.
Our Take On Wang-Zheng 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 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'd like to know more about Wang-Zheng Berhad, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.