Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. In light of that, from a first glance at Esthetics International Group Berhad (KLSE:EIG), 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 Esthetics International Group Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0083 = RM1.6m ÷ (RM261m - RM67m) (Based on the trailing twelve months to September 2023).

So, Esthetics International Group Berhad has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.3%.

Check out our latest analysis for Esthetics International Group Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Esthetics International Group Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Esthetics International Group Berhad, check out these free graphs here.

So How Is Esthetics International Group Berhad's ROCE Trending?

We are a bit worried about the trend of returns on capital at Esthetics International Group Berhad. To be more specific, the ROCE was 3.0% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Esthetics International Group Berhad to turn into a multi-bagger.

The Key Takeaway

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. It should come as no surprise then that the stock has fallen 38% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Esthetics International Group Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

While Esthetics International Group Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.