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.
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: Wholesale Pvc Curtain Rail Factories
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.
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.
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.
If you'd like to know more about Lysaght Galvanized Steel Berhad, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Wholesale Magnetic Thermal Insulated Door Curtain For Manufacturers Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.