There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at V.S. Industry Berhad (KLSE:VS) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. The formula for this calculation on V.S. Industry Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = RM258m ÷ (RM4.0b - RM952m) (Based on the trailing twelve months to April 2024).
So, V.S. Industry Berhad has an ROCE of 8.6%. On its own, that's a low figure but it's around the 11% average generated by the Electronic industry.
Check out our latest analysis for V.S. Industry Berhad
Above you can see how the current ROCE for V.S. Industry Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for V.S. Industry Berhad .
What Can We Tell From V.S. Industry Berhad's ROCE Trend?
There are better returns on capital out there than what we're seeing at V.S. Industry Berhad. The company has employed 59% more capital in the last five years, and the returns on that capital have remained stable at 8.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On a side note, V.S. Industry Berhad has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line
In summary, V.S. Industry Berhad has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 87% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a separate note, we've found 1 warning sign for V.S. Industry Berhad you'll probably want to know about.