Vortex Consolidated Berhad (KLSE:VC) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 on that note, Vortex Consolidated Berhad (KLSE:VC) looks quite promising in regards to its trends of return on capital.

Understanding 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. The formula for this calculation on Vortex Consolidated Berhad is:

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

0.0034 = RM658k ÷ (RM331m - RM139m) (Based on the trailing twelve months to December 2020).

Therefore, Vortex Consolidated Berhad has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Electronic industry average of 11%.

See our latest analysis for Vortex Consolidated Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vortex Consolidated Berhad's ROCE against it's prior returns. If you're interested in investigating Vortex Consolidated Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Vortex Consolidated Berhad is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Vortex Consolidated Berhad is utilizing 177% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 42% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In summary, it's great to see that Vortex Consolidated Berhad has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 69% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing Vortex Consolidated Berhad we've found 5 warning signs (3 are a bit concerning!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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