Here's What's Concerning About Rex Industry Berhad's (KLSE:REX) Returns On Capital

Simply Wall St
·3 min read

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Rex Industry Berhad (KLSE:REX), we weren't too upbeat about how things were going.

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 Rex Industry Berhad, this is the formula:

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

0.01 = RM1.6m ÷ (RM208m - RM53m) (Based on the trailing twelve months to September 2022).

Thus, Rex Industry Berhad has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.

Check out our latest analysis for Rex Industry Berhad

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

What Can We Tell From Rex Industry Berhad's ROCE Trend?

In terms of Rex Industry Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 1.5% 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. 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 Rex Industry Berhad becoming one if things continue as they have.

The Bottom Line On Rex Industry Berhad's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 59% over the last five 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 about the risks facing Rex Industry Berhad, we've discovered 2 warning signs that you should be aware of.

While Rex Industry 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.

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.

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