Magnum Berhad's (KLSE:MAGNUM) Returns On Capital Tell Us There Is Reason To Feel Uneasy
What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Magnum Berhad (KLSE:MAGNUM), we've spotted some signs that it could be struggling, so let's investigate.
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Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Magnum Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = RM266m ÷ (RM3.6b - RM482m) (Based on the trailing twelve months to March 2025).
Therefore, Magnum Berhad has an ROCE of 8.6%. In absolute terms, that's a low return but it's around the Hospitality industry average of 8.1%.
See our latest analysis for Magnum Berhad
Above you can see how the current ROCE for Magnum 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 Magnum Berhad for free.
We are a bit worried about the trend of returns on capital at Magnum Berhad. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Magnum Berhad becoming one if things continue as they have.
In summary, it's unfortunate that Magnum Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 31% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Magnum Berhad does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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