To avoid investing in a business that’s in decline, there’s a few financial metrics that can provide early indications of aging. 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. This reveals that the company isn’t compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don’t look too good at Astro Malaysia Holdings Berhad (KLSE:ASTRO), so let’s see why.

Understanding Return On Capital Employed (ROCE)

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 Astro Malaysia Holdings Berhad:

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

0.087 = RM354m ÷ (RM5.7b – RM1.6b) (Based on the trailing twelve months to July 2023).

Therefore, Astro Malaysia Holdings Berhad has an ROCE of 8.7%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 8.8%.

View our latest analysis for Astro Malaysia Holdings Berhad

In the above chart we have measured Astro Malaysia Holdings Berhad’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Astro Malaysia Holdings Berhad here for free.

How Are Returns Trending?

There is reason to be cautious about Astro Malaysia Holdings Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 19% 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. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Astro Malaysia Holdings Berhad becoming one if things continue as they have.

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The Key Takeaway

In summary, it’s unfortunate that Astro Malaysia Holdings Berhad is generating lower returns from the same amount of capital. Investors haven’t taken kindly to these developments, since the stock has declined 59% from where it was five years ago. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.

On a final note, we found 3 warning signs for Astro Malaysia Holdings Berhad (1 is a bit concerning) you should be aware of.

While Astro Malaysia 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.