If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Visdynamics Holdings Berhad (KLSE:VIS), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Visdynamics Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = RM3.9m ÷ (RM74m - RM5.9m) (Based on the trailing twelve months to October 2023).
So, Visdynamics Holdings Berhad has an ROCE of 5.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.7%.
See our latest analysis for Visdynamics Holdings 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 , check out these free graphs detailing revenue and cash flow performance of Visdynamics Holdings Berhad.
The Trend Of ROCE
On the surface, the trend of ROCE at Visdynamics Holdings Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.7% from 24% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a related note, Visdynamics Holdings Berhad has decreased its current liabilities to 7.9% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On Visdynamics Holdings Berhad's ROCE
In summary, we're somewhat concerned by Visdynamics Holdings Berhad's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 24% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.