Karyon Industries Berhad (KLSE:KARYON) Is Finding It Tricky To Allocate Its

When researching a stock for investment, what can tell us that the company is in decline? Typically, we’ll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing 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. In light of that, from a first glance at Karyon Industries Berhad (KLSE:KARYON), we’ve spotted some signs that it could be struggling, so let’s investigate.

Understanding Return On Capital Employed (ROCE)

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Karyon Industries Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.069 = RM8.7m ÷ (RM144m – RM17m) (Based on the trailing twelve months to December 2023).

So, Karyon Industries Berhad has an ROCE of 6.9%. Even though it’s in line with the industry average of 6.6%, it’s still a low return by itself.

Check out our latest analysis for Karyon Industries Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Karyon Industries Berhad’s ROCE against it’s prior returns. If you’d like to look at how Karyon Industries Berhad has performed in the past in other metrics, you can view this free graph of Karyon Industries Berhad’s past earnings, revenue and cash flow.

So How Is Karyon Industries Berhad’s ROCE Trending?

In terms of Karyon Industries Berhad’s historical ROCE movements, the trend doesn’t inspire confidence. Unfortunately the returns on capital have diminished from the 11% 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 Karyon Industries Berhad to turn into a multi-bagger.

In Conclusion…

All in all, the lower returns from the same amount of capital employed aren’t exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 76% return. Regardless, we don’t feel too comfortable with the fundamentals so we’d be steering clear of this stock for now.

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One more thing to note, we’ve identified 2 warning signs with Karyon Industries Berhad and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.