Velesto Energy Berhad (KLSE:VELESTO) Is Experiencing Growth In Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Velesto Energy Berhad (KLSE:VELESTO) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Velesto Energy Berhad, this is the formula:

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

0.15 = RM408m ÷ (RM3.0b - RM291m) (Based on the trailing twelve months to September 2021).

Thus, Velesto Energy Berhad has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 8.2% it's much better.

View our latest analysis for Velesto Energy Berhad

In the above chart we have measured Velesto Energy Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Velesto Energy Berhad.

What Does the ROCE Trend For Velesto Energy Berhad Tell Us?

We're delighted to see that Velesto Energy Berhad is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Velesto Energy Berhad is using 50% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Velesto Energy Berhad could be selling under-performing assets since the ROCE is improving.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 9.7%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

In summary, it's great to see that Velesto Energy Berhad has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 81% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

While Velesto Energy Berhad looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether VELESTO is currently trading for a fair price.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.