Be Wary Of Solid Automotive Berhad (KLSE:SOLID) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Solid Automotive Berhad (KLSE:SOLID) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Solid Automotive Berhad, this is the formula:

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

0.045 = RM8.6m ÷ (RM271m - RM79m) (Based on the trailing twelve months to January 2021).

Thus, Solid Automotive Berhad has an ROCE of 4.5%. In absolute terms, that's a low return but it's around the Retail Distributors industry average of 5.5%.

Check out our latest analysis for Solid Automotive Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Solid Automotive Berhad's ROCE against it's prior returns. If you'd like to look at how Solid Automotive Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Solid Automotive Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.5% from 7.0% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 29%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.5%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Solid Automotive Berhad's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 58% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 5 warning signs we've spotted with Solid Automotive Berhad (including 1 which can't be ignored) .

While Solid Automotive 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. 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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