There Are Reasons To Feel Uneasy About Solarvest Holdings Berhad's (KLSE:SLVEST) Returns On Capital
If we want to discover a potential investment opportunity with a high return, there are often indications of this. Ideally, a company will exhibit two trends: a rising return on capital employed (ROCE) and an increasing amount of capital employed. If these are present, it typically shows that the company has a successful business model and several profitable reinvestment options. However, after a quick examination of the data, it appears that Solarvest Holdings Berhad (KLSE:SLVEST) does not have the potential for significant growth in the future. Let's explore why.
Understanding ROCE: A Guide To Return On Capital Employed
If you're unfamiliar with ROCE, it quantifies the 'profit' (before taxes) that a company earns from the capital it invests in its operations. To compute this measurement for Solarvest Holdings Berhad, use the following equation:
The formula for Return on Capital Employed (ROCE) can be expressed as Earnings Before Interest and Tax (EBIT) divided by the difference between Total Assets and Current Liabilities.
The value of 0.10 is calculated by dividing RM32 million by the difference between RM476 million and RM167 million. This calculation is based on the financial data from the previous twelve months until March 2023.
Therefore, Solarvest Holdings Berhad generates a satisfactory 10% return on capital, which aligns with the average returns commonly observed in the industry.
Check out our most recent examination of Solarvest Holdings Berhad
In the chart provided, we have assessed the past Return on Capital Employed (ROCE) of Solarvest Holdings Berhad in comparison to its previous achievements. However, looking ahead, the future holds greater significance. If you're curious, you can access the forecasts of analysts for the company in our complimentary report on analysts' predictions.
ROCE: A Soaring Trend
When we analyzed the ROCE pattern at Solarvest Holdings Berhad, we didn't feel very reassured. To clarify, the ROCE has decreased by 35% in the past five years. Nevertheless, considering that both the capital employed and revenue have risen, it seems that the company is currently prioritizing expansion, even if it means sacrificing immediate profits. Moreover, if the increased capital leads to additional returns, the company will ultimately benefit, along with its shareholders.
By the way, it is worth mentioning that the current obligations of Solarvest Holdings Berhad have risen in the past five years to represent 35% of their total assets. This has somewhat skewed the return on capital employed (ROCE). Had the increase in current liabilities not been as significant, the ROCE could have been even lower. It is advisable to monitor this ratio closely, as an excessively high level could potentially expose the company to new risks.
Our View On Solarvest's ROCE
Despite experiencing a decrease in short-term financial gains, it is noteworthy that Solarvest Holdings Berhad has recorded an increase in both revenue and capital employed. Additionally, the company's stock has seen a 41% rise over the past three years, indicating a positive outlook from investors. While this suggests that investors have acknowledged these encouraging developments, we should delve deeper into this stock to ensure that other key indicators support the optimistic perspective.
On a different topic, we have come across one cautionary signal regarding Solarvest Holdings Berhad that you may find valuable.
If you're interested in finding reputable companies with strong profits, take a look at this complimentary compilation of firms that possess favorable financial standings and remarkable returns on investment.
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The blog section written by Simply Wall St is of a general nature. We offer our opinions based on past information and predictions from analysts, while using a fair and impartial approach. Our articles are not meant to provide financial guidance and should not be considered as such. They do not endorse or discourage the buying or selling of any stocks, and they do not consider your personal goals or financial standing. Our objective is to present analysis that focuses on the long-term, driven by fundamental data. Please note that our analysis may not take into account the most recent company announcements or subjective factors. Simply Wall St has no vested interest in any of the mentioned stocks.
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