Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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. So after we looked into Aneka Jaringan Holdings Berhad (KLSE:ANEKA), the trends above didn't look too great.

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 Aneka Jaringan Holdings Berhad:

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

0.037 = RM4.0m ÷ (RM246m - RM136m) (Based on the trailing twelve months to February 2024).

Thus, Aneka Jaringan Holdings Berhad has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.7%.

View our latest analysis for Aneka Jaringan Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Aneka Jaringan Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Aneka Jaringan Holdings Berhad.

What Can We Tell From Aneka Jaringan Holdings Berhad's ROCE Trend?

There is reason to be cautious about Aneka Jaringan Holdings Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 26% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Aneka Jaringan Holdings Berhad to turn into a multi-bagger.

Another thing to note, Aneka Jaringan Holdings Berhad has a high ratio of current liabilities to total assets of 55%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

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 15% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Aneka Jaringan Holdings Berhad, we've spotted 3 warning signs, and 1 of them is concerning.

While Aneka Jaringan Holdings Berhad 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.