Capital Allocation Trends At Asia Brands Berhad (KLSE:ASIABRN) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Asia Brands Berhad (KLSE:ASIABRN) and its ROCE trend, we weren't exactly thrilled.

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What Is 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 Asia Brands Berhad:

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

0.028 = RM7.1m ÷ (RM303m - RM52m) (Based on the trailing twelve months to December 2024).

Therefore, Asia Brands Berhad has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 4.8%.

Check out our latest analysis for Asia Brands 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'd like to look at how Asia Brands Berhad has performed in the past in other metrics, you can view this free graph of Asia Brands Berhad's past earnings, revenue and cash flow .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Asia Brands Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.4% over the last five years. However it looks like Asia Brands Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Asia Brands Berhad has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Asia Brands Berhad's ROCE

To conclude, we've found that Asia Brands Berhad is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 46% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Asia Brands Berhad does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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.