Yahoo Finance Returns On Capital At Elsoft Research Berhad (KLSE:ELSOFT) Paint A Concerning Picture
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Elsoft Research Berhad (KLSE:ELSOFT), we weren't too upbeat about how things were going.
What Is 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. Analysts use this formula to calculate it for Elsoft Research Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = RM12m ÷ (RM125m - RM9.7m) (Based on the trailing twelve months to September 2022).
Thus, Elsoft Research Berhad has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Semiconductor industry average it falls behind.
View our latest analysis for Elsoft Research Berhad
Above you can see how the current ROCE for Elsoft Research Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
There is reason to be cautious about Elsoft Research Berhad, given the returns are trending downwards. To be more specific, the ROCE was 24% 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. 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 Elsoft Research Berhad becoming one if things continue as they have.
Our Take On Elsoft Research Berhad's ROCE
In summary, it's unfortunate that Elsoft Research Berhad is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 38% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you'd like to know about the risks facing Elsoft Research Berhad, we've discovered 2 warning signs that you should be aware of.
While Elsoft Research 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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