Will the Promising Trends At VibroPower (SGX:BJD) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in VibroPower's (SGX:BJD) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for VibroPower:

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

0.012 = S$294k ÷ (S$31m - S$7.1m) (Based on the trailing twelve months to December 2020).

Therefore, VibroPower has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.1%.

View our latest analysis for VibroPower

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 VibroPower's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that VibroPower is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.2% which is a sight for sore eyes. Not only that, but the company is utilizing 41% more capital than before, but that's to be expected from a company 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 23%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that VibroPower has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

In summary, it's great to see that VibroPower has managed to break into profitability and is continuing to reinvest in its business. And since the stock has dived 72% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you want to continue researching VibroPower, you might be interested to know about the 2 warning signs that our analysis has discovered.

While VibroPower isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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