Returns On Capital At Volcano Berhad (KLSE:VOLCANO) Paint A Concerning Picture

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Volcano Berhad (KLSE:VOLCANO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Volcano Berhad is:

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

0.089 = RM7.3m ÷ (RM94m - RM11m) (Based on the trailing twelve months to June 2022).

Thus, Volcano Berhad has an ROCE of 8.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 13%.

View our latest analysis for Volcano Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Volcano Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Volcano Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Volcano Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last three years. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Volcano Berhad's ROCE

While returns have fallen for Volcano Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 12% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 2 warning signs for Volcano Berhad that we think you should be aware of.

While Volcano Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.