If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Lysaght Galvanized Steel Berhad (KLSE:LYSAGHT), 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. The formula for this calculation on Lysaght Galvanized Steel Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = RM9.2m ÷ (RM182m - RM6.7m) (Based on the trailing twelve months to June 2023).
Thus, Lysaght Galvanized Steel Berhad has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.1%.
View our latest analysis for Lysaght Galvanized Steel 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, revenue and cash flow of Lysaght Galvanized Steel Berhad, check out these free graphs here.
What Can We Tell From Lysaght Galvanized Steel Berhad's ROCE Trend?
In terms of Lysaght Galvanized Steel Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.3% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Lysaght Galvanized Steel Berhad becoming one if things continue as they have.
The Key Takeaway
In summary, it's unfortunate that Lysaght Galvanized Steel Berhad is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.