If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think Solarvest Holdings Berhad (KLSE:SLVEST) 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?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Solarvest Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = RM32m ÷ (RM476m - RM167m) (Based on the trailing twelve months to March 2023).
So, Solarvest Holdings Berhad has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.
View our latest analysis for Solarvest Holdings Berhad
In the above chart we have measured Solarvest Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
When we looked at the ROCE trend at Solarvest Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 35% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Solarvest Holdings Berhad's current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
Our Take On Solarvest Holdings Berhad's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Solarvest Holdings Berhad. Furthermore the stock has climbed 41% over the last three years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.