To avoid investing in a declining business, there are a few financial metrics that can provide early indications of aging. A potentially declining business often exhibits two trends, one come back on capital employed (ROCE) which is down, and a base capital employed, which is also down. This tells us that not only is the company reducing the size of its net assets, but its returns are also decreasing. And from a first reading, things don’t look very good to Ouzma Berhad (KLSE:UZMA), so let’s see why.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Uzma Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.021 = RM17m ÷ (RM1.2b – RM397m) (Based on the last twelve months to March 2022).
Thereby, Uzma Berhad posted a ROCE of 2.1%. In absolute terms, this is a weak return and it is also below the energy services industry average of 7.8%.
See our latest analysis for Uzma Berhad
In the chart above, we measured Uzma Berhad’s past ROCE against his past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What can we say about Uzma Berhad’s ROCE trend?
We are a bit worried about the evolution of capital returns at Uzma Berhad. About five years ago, the return on capital was 5.8%, but now it is significantly lower than what we saw above. In addition to this, it should be noted that the amount of capital used within the company remained relatively stable. This combination may be a sign of a mature business that still has areas to deploy capital, but the returns received are not as high due potentially to new competition or lower margins. So, because these trends aren’t usually conducive to creating a multi-bagger, we wouldn’t hold our breath for Uzma Berhad to become one if things continue as they have.
Overall, lower returns from the same amount of capital employed are not exactly signs of a compounding machine. We predict this has contributed to the stock’s 77% drop over the past five years. That being the case, unless the underlying trends return to a more positive trajectory, we would consider looking elsewhere.
Uzma Berhad has risks, we noticed that 4 warning signs (and 1 that can’t be ignored) that we think you should know about.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.