To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within SCC Holdings Berhad (KLSE:SCC), we weren't too hopeful.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on SCC Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = RM4.3m ÷ (RM53m - RM4.6m) (Based on the trailing twelve months to December 2022).
So, SCC Holdings Berhad has an ROCE of 8.9%. Even though it's in line with the industry average of 8.9%, it's still a low return by itself.
See our latest analysis for SCC Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for SCC Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how SCC Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is SCC Holdings Berhad's ROCE Trending?
In terms of SCC Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 18% that they were earning five years ago. 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 SCC Holdings Berhad to turn into a multi-bagger.
What We Can Learn From SCC Holdings Berhad's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 20% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.