Here's What's Concerning About AYS Ventures Berhad's (KLSE:AYS) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating AYS Ventures Berhad (KLSE:AYS), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for AYS Ventures Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.06 = RM17m ÷ (RM701m - RM423m) (Based on the trailing twelve months to December 2020).

So, AYS Ventures Berhad has an ROCE of 6.0%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

See our latest analysis for AYS Ventures Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for AYS Ventures Berhad's ROCE against it's prior returns. If you're interested in investigating AYS Ventures Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is AYS Ventures Berhad's ROCE Trending?

In terms of AYS Ventures Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.0% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a side note, AYS Ventures Berhad's current liabilities are still rather high at 60% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On AYS Ventures Berhad's ROCE

In summary, AYS Ventures Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 66% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

AYS Ventures Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those make us uncomfortable...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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