Here's What To Make Of Solarvest Holdings Berhad's (KLSE:SLVEST) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Solarvest Holdings Berhad (KLSE:SLVEST) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Solarvest Holdings Berhad:

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

0.15 = RM15m ÷ (RM166m - RM70m) (Based on the trailing twelve months to June 2020).

Thus, Solarvest Holdings Berhad has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 10% it's much better.

View our latest analysis for Solarvest Holdings Berhad

In the above chart we have measured Solarvest Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Solarvest Holdings Berhad here for free.

So How Is Solarvest Holdings Berhad's ROCE Trending?

On the surface, the trend of ROCE at Solarvest Holdings Berhad doesn't inspire confidence. Around four years ago the returns on capital were 37%, but since then they've fallen to 15%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Solarvest Holdings Berhad has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Solarvest Holdings Berhad is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 87% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Solarvest Holdings Berhad it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Solarvest Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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