Returns On Capital Signal Tricky Times Ahead For Visdynamics Holdings Berhad (KLSE:VIS)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Visdynamics Holdings Berhad (KLSE:VIS), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Visdynamics Holdings Berhad, this is the formula:

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

0.20 = RM12m ÷ (RM75m - RM13m) (Based on the trailing twelve months to July 2022).

Thus, Visdynamics Holdings Berhad has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Our analysis indicates that VIS is potentially undervalued!

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

What Does the ROCE Trend For Visdynamics Holdings Berhad Tell Us?

On the surface, the trend of ROCE at Visdynamics Holdings Berhad doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 29%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a side note, Visdynamics Holdings Berhad has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Visdynamics Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Visdynamics Holdings 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 27% in the last five years. Therefore based on the analysis done in this article, we don't think Visdynamics Holdings Berhad has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Visdynamics Holdings Berhad (at least 1 which is potentially serious) , and understanding them would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.