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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 investigating V.S. Industry Berhad (KLSE:VS), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 V.S. Industry Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = RM284m ÷ (RM4.3b - RM1.1b) (Based on the trailing twelve months to January 2023).
Therefore, V.S. Industry Berhad has an ROCE of 9.0%. Ultimately, that's a low return and it under-performs the Electronic industry average of 16%.
See our latest analysis for V.S. Industry Berhad
In the above chart we have measured V.S. Industry Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering V.S. Industry Berhad here for free.
How Are Returns Trending?
On the surface, the trend of ROCE at V.S. Industry Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.0% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, V.S. Industry Berhad has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by V.S. Industry Berhad's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think V.S. Industry Berhad has the makings of a multi-bagger.