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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Valuetronics Holdings (SGX:BN2) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Valuetronics Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = HK$106m ÷ (HK$2.2b - HK$740m) (Based on the trailing twelve months to September 2024).
Thus, Valuetronics Holdings has an ROCE of 7.4%. On its own, that's a low figure but it's around the 8.8% average generated by the Electronic industry.
See our latest analysis for Valuetronics Holdings
Above you can see how the current ROCE for Valuetronics Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Valuetronics Holdings .
What Does the ROCE Trend For Valuetronics Holdings Tell Us?
In terms of Valuetronics Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.4% from 18% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Valuetronics Holdings has decreased its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.