Cahya Mata Sarawak Berhad (KLSE:CMSB) Will Be Hoping To Turn Its Returns On Capital Around
If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Cahya Mata Sarawak Berhad (KLSE:CMSB), we weren't too upbeat about how things were going.
Understanding 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. 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)
0.00047 = RM1.8m ÷ (RM4.8b - RM898m) (Based on the trailing twelve months to March 2023).
So, Cahya Mata Sarawak Berhad has an ROCE of 0.05%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 3.9%.
See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Cahya Mata Sarawak Berhad.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Cahya Mata Sarawak Berhad. Unfortunately the returns on capital have diminished from the 6.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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.
Our Take On Cahya Mata Sarawak 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. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Cahya Mata Sarawak Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...
While Cahya Mata Sarawak Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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