Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Velesto Energy Berhad (KLSE:VELESTO) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Velesto Energy Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = RM267m ÷ (RM3.3b - RM427m) (Based on the trailing twelve months to June 2024).
Thus, Velesto Energy Berhad has an ROCE of 9.3%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 14%.
View our latest analysis for Velesto Energy Berhad
Above you can see how the current ROCE for Velesto Energy 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 Velesto Energy Berhad .
The Trend Of ROCE
We're pretty happy with how the ROCE has been trending at Velesto Energy Berhad. We found that the returns on capital employed over the last five years have risen by 354%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 25% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
What We Can Learn From Velesto Energy Berhad's ROCE
In the end, Velesto Energy Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 38% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for VELESTO on our platform that is definitely worth checking out.