Here's What's Concerning About ViTrox Corporation Berhad's (KLSE:VITROX) Returns On Capital

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. 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. Looking at ViTrox Corporation Berhad (KLSE:VITROX), it does have a high ROCE right now, but lets see how returns are trending.

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 ViTrox Corporation Berhad, this is the formula:

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

0.24 = RM249m ÷ (RM1.2b - RM139m) (Based on the trailing twelve months to March 2024).

Therefore, ViTrox Corporation Berhad has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 7.5% earned by companies in a similar industry.

Check out our latest analysis for ViTrox Corporation Berhad

Above you can see how the current ROCE for ViTrox Corporation Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ViTrox Corporation Berhad for free.

How Are Returns Trending?

In terms of ViTrox Corporation Berhad's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 39%, but they have dropped over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about ViTrox Corporation Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 122% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing ViTrox Corporation Berhad that you might find interesting.

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.