If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Solid Automotive Berhad's (KLSE:SOLID) returns on capital, so let's have a look.
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. The formula for this calculation on Solid Automotive Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = RM15m ÷ (RM303m - RM94m) (Based on the trailing twelve months to July 2022).
Therefore, Solid Automotive Berhad has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 9.7%.
View our latest analysis for Solid Automotive Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Solid Automotive Berhad's ROCE against it's prior returns. If you'd like to look at how Solid Automotive Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 47% more capital is being employed now too. So we're very much inspired by what we're seeing at Solid Automotive Berhad thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 31% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Key Takeaway
All in all, it's terrific to see that Solid Automotive Berhad is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 39% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.