We're Watching These Trends At Solid Automotive Berhad (KLSE:SOLID)

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Solid Automotive Berhad (KLSE:SOLID) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Solid Automotive Berhad, this is the formula:

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

0.02 = RM3.3m ÷ (RM245m - RM80m) (Based on the trailing twelve months to October 2020).

So, Solid Automotive Berhad has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 7.4%.

View 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 want to delve into the historical earnings, revenue and cash flow of Solid Automotive Berhad, check out these free graphs here.

What Can We Tell From Solid Automotive Berhad's ROCE Trend?

On the surface, the trend of ROCE at Solid Automotive Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. However it looks like Solid Automotive Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.0%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Solid Automotive Berhad's ROCE

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. Since the stock has declined 65% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Solid Automotive Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is concerning...

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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