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When we’re researching a company, it’s sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into SWS Capital Berhad (KLSE:SWSCAP), we weren’t too upbeat about how things were going.
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. Analysts use this formula to calculate it for SWS Capital Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.082 = RM12m ÷ (RM200m – RM60m) (Based on the trailing twelve months to September 2022).
So, SWS Capital Berhad has an ROCE of 8.2%. Ultimately, that’s a low return and it under-performs the Consumer Durables industry average of 11%.
See our latest analysis for SWS Capital Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for SWS Capital Berhad’s ROCE against it’s prior returns. If you want to delve into the historical earnings, revenue and cash flow of SWS Capital Berhad, check out these free graphs here.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at SWS Capital Berhad. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. 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. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on SWS Capital Berhad becoming one if things continue as they have.
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 65% 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.
One more thing: We’ve identified 4 warning signs with SWS Capital Berhad (at least 1 which is concerning) , and understanding these would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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