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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Venture (SGX:V03), so let's see why.
What Is Return On Capital Employed (ROCE)?
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 Venture, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = S$272m ÷ (S$3.6b - S$755m) (Based on the trailing twelve months to June 2024).
Therefore, Venture has an ROCE of 9.5%. On its own, that's a low figure but it's around the 8.3% average generated by the Electronic industry.
Check out our latest analysis for Venture
In the above chart we have measured Venture's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Venture .
So How Is Venture's ROCE Trending?
In terms of Venture's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 18% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Venture becoming one if things continue as they have.
The Bottom Line On Venture's ROCE
In summary, it's unfortunate that Venture is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 1.3% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
One more thing to note, we've identified 1 warning sign with Venture and understanding this should be part of your investment process.