Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Volcano Berhad (KLSE:VOLCANO) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Volcano Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = RM8.4m ÷ (RM95m - RM8.0m) (Based on the trailing twelve months to December 2022).
Thus, Volcano Berhad has an ROCE of 9.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 14%.
Check out our latest analysis for Volcano 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 Volcano Berhad, check out these free graphs here.
What Can We Tell From Volcano Berhad's ROCE Trend?
In terms of Volcano Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last four years. 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.
In Conclusion...
In summary, Volcano Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 106% return in the last year, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you want to know some of the risks facing Volcano Berhad we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.