If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Ranhill Utilities Berhad (KLSE:RANHILL) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Ranhill Utilities Berhad is:

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

0.0022 = RM5.8m ÷ (RM3.8b - RM1.1b) (Based on the trailing twelve months to June 2024).

So, Ranhill Utilities Berhad has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 7.4%.

View our latest analysis for Ranhill Utilities Berhad

Above you can see how the current ROCE for Ranhill Utilities Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ranhill Utilities Berhad for free.

The Trend Of ROCE

In terms of Ranhill Utilities Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 8.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Ranhill Utilities Berhad becoming one if things continue as they have.

The Bottom Line On Ranhill Utilities 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. Investors must expect better things on the horizon though because the stock has risen 17% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Ranhill Utilities Berhad (including 1 which doesn't sit too well with us) .

While Ranhill Utilities 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.

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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.