Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Solid Automotive Berhad (KLSE:SOLID) and its trend of ROCE, we really liked what we saw.
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. To calculate this metric for Solid Automotive Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = RM15m ÷ (RM305m - RM103m) (Based on the trailing twelve months to January 2023).
So, Solid Automotive Berhad has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Retail Distributors industry average of 8.3%.
Check out our latest analysis for Solid Automotive Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Solid Automotive Berhad, check out these free graphs here.
What Can We Tell From Solid Automotive Berhad's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 7.3%. The amount of capital employed has increased too, by 42%. So we're very much inspired by what we're seeing at Solid Automotive Berhad thanks to its ability to profitably reinvest capital.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 34% 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 Bottom Line On Solid Automotive Berhad's ROCE
To sum it up, Solid Automotive Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 48% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.