OKA Corporation Bhd (KLSE:OKA) Could Be At Risk Of Shrinking As A Company
If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, OKA Corporation Bhd (KLSE:OKA) we aren't filled with optimism, but let's investigate further.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for OKA Corporation Bhd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.018 = RM3.5m ÷ (RM223m - RM33m) (Based on the trailing twelve months to December 2023).
Therefore, OKA Corporation Bhd has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 5.6%.
See our latest analysis for OKA Corporation Bhd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how OKA Corporation Bhd has performed in the past in other metrics, you can view this free graph of OKA Corporation Bhd's past earnings, revenue and cash flow.
What Can We Tell From OKA Corporation Bhd's ROCE Trend?
We are a bit worried about the trend of returns on capital at OKA Corporation Bhd. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 OKA Corporation Bhd becoming one if things continue as they have.
What We Can Learn From OKA Corporation Bhd'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. In spite of that, the stock has delivered a 35% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
If you want to know some of the risks facing OKA Corporation Bhd we've found 4 warning signs (2 can't be ignored!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.