To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. So after we looked into Focus Lumber Berhad (KLSE:FLBHD), the trends above didn't look too great.

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. To calculate this metric for Focus Lumber Berhad, this is the formula:

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

0.03 = RM5.6m ÷ (RM192m - RM5.9m) (Based on the trailing twelve months to June 2023).

Therefore, Focus Lumber Berhad has an ROCE of 3.0%. Even though it's in line with the industry average of 3.0%, it's still a low return by itself.

See our latest analysis for Focus Lumber Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Focus Lumber Berhad's ROCE against it's prior returns. If you're interested in investigating Focus Lumber Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Focus Lumber Berhad Tell Us?

There is reason to be cautious about Focus Lumber Berhad, given the returns are trending downwards. To be more specific, the ROCE was 7.8% 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. 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 Focus Lumber Berhad becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.