Returns On Capital Signal Tricky Times Ahead For ViTrox Corporation Berhad (KLSE:VITROX)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at ViTrox Corporation Berhad (KLSE:VITROX), 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 ViTrox Corporation Berhad, this is the formula:

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

0.23 = RM239m ÷ (RM1.2b - RM153m) (Based on the trailing twelve months to June 2024).

Therefore, ViTrox Corporation Berhad has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 8.3%.

See our latest analysis for ViTrox Corporation Berhad

In the above chart we have measured ViTrox Corporation 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 analyst report for ViTrox Corporation Berhad .

What Can We Tell From ViTrox Corporation Berhad's ROCE Trend?

When we looked at the ROCE trend at ViTrox Corporation Berhad, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 38%. 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.

The Bottom Line On ViTrox Corporation Berhad's ROCE

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. Yet despite these concerning fundamentals, the stock has performed strongly with a 88% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you're still interested in ViTrox Corporation Berhad it's worth checking out our FREE intrinsic value approximation for VITROX to see if it's trading at an attractive price in other respects.

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.