Cahya Mata Sarawak Berhad (KLSE:CMSB) May Have Issues Allocating Its Capital
When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Cahya Mata Sarawak Berhad (KLSE:CMSB), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Cahya Mata Sarawak Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0038 = RM14m ÷ (RM4.6b - RM786m) (Based on the trailing twelve months to June 2023).
So, Cahya Mata Sarawak Berhad has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 4.2%.
Check out our latest analysis for Cahya Mata Sarawak Berhad
In the above chart we have measured Cahya Mata Sarawak Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Cahya Mata Sarawak Berhad's ROCE Trend?
In terms of Cahya Mata Sarawak Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.9% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Cahya Mata Sarawak Berhad becoming one if things continue as they have.
The Key Takeaway
In summary, it's unfortunate that Cahya Mata Sarawak Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 62% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we found 3 warning signs for Cahya Mata Sarawak Berhad (1 is significant) you should be aware of.
While Cahya Mata Sarawak 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.
