What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for OKA Corporation Bhd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = RM23m ÷ (RM218m - RM26m) (Based on the trailing twelve months to June 2022).
So, OKA Corporation Bhd has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 2.7% it's much better.
Check out our latest analysis for OKA Corporation Bhd
Historical performance is a great place to start when researching a stock so above you can see the gauge for OKA Corporation Bhd's ROCE against it's prior returns. If you're interested in investigating OKA Corporation Bhd's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From OKA Corporation Bhd's ROCE Trend?
There is reason to be cautious about OKA Corporation Bhd, given the returns are trending downwards. To be more specific, the ROCE was 21% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.
The Bottom Line On OKA Corporation Bhd's ROCE
In summary, it's unfortunate that OKA Corporation Bhd is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 1.2% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
OKA Corporation Bhd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...
While OKA Corporation Bhd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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