Consumer Durables News

Emico Holdings Berhad (KLSE:EMICO) Has Some Difficulty Using Its Capital Effectively


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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Emico Holdings Berhad (KLSE:EMICO), we weren’t too hopeful.

Understanding 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. The formula for this calculation on Emico Holdings Berhad is:

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

0.026 = RM1.6m ÷ (RM80m – RM17m) (Based on the trailing twelve months to June 2022).

Thus, Emico Holdings Berhad has an ROCE of 2.6%. In absolute terms, that’s a low return and it also under-performs the Consumer Durables industry average of 12%.

Check out our latest analysis for Emico Holdings Berhad

roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Emico Holdings Berhad’s ROCE against it’s prior returns. If you’d like to look at how Emico Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Emico Holdings Berhad’s historical ROCE movements, the trend doesn’t inspire confidence. About five years ago, returns on capital were 17%, however they’re now substantially lower than that as we saw above. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. 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 Emico Holdings Berhad to turn into a multi-bagger.

The Bottom Line

In summary, it’s unfortunate that Emico Holdings Berhad is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 16% in the last five years. Regardless, we don’t like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you’d like to know about the risks facing Emico Holdings Berhad, we’ve discovered 2 warning signs that you should be aware of.

While Emico Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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