Yahoo Finance The Returns On Capital At B.I.G. Industries Berhad (KLSE:BIG) Don't Inspire Confidence
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at B.I.G. Industries Berhad (KLSE:BIG), so let's see why.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for B.I.G. Industries Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = RM934k ÷ (RM61m - RM13m) (Based on the trailing twelve months to March 2024).
Thus, B.I.G. Industries Berhad has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.6%.
Check out our latest analysis for B.I.G. Industries Berhad
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of B.I.G. Industries Berhad.
So How Is B.I.G. Industries Berhad's ROCE Trending?
We are a bit worried about the trend of returns on capital at B.I.G. Industries Berhad. To be more specific, the ROCE was 2.7% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect B.I.G. Industries Berhad to turn into a multi-bagger.
On a related note, B.I.G. Industries Berhad has decreased its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
In summary, it's unfortunate that B.I.G. Industries Berhad is generating lower returns from the same amount of capital. Since the stock has skyrocketed 109% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing to note, we've identified 1 warning sign with B.I.G. Industries Berhad and understanding this should be part of your investment process.
While B.I.G. Industries 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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