We Like These Underlying Return On Capital Trends At Solution Group Berhad (KLSE:SOLUTN)

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Solution Group Berhad (KLSE:SOLUTN) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Solution Group Berhad:

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

0.053 = RM4.8m ÷ (RM132m - RM42m) (Based on the trailing twelve months to June 2024).

Thus, Solution Group Berhad has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 10%.

Check out our latest analysis for Solution Group Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Solution Group Berhad's past further, check out this free graph covering Solution Group Berhad's past earnings, revenue and cash flow.

How Are Returns Trending?

Solution Group Berhad has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 5.3% which is a sight for sore eyes. In addition to that, Solution Group Berhad is employing 98% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 32% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Solution Group Berhad's ROCE

Long story short, we're delighted to see that Solution Group Berhad's reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 8.9% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Solution Group Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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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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.