If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Volcano Berhad (KLSE:VOLCANO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Volcano Berhad, this is the formula:

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

0.049 = RM5.1m ÷ (RM118m - RM13m) (Based on the trailing twelve months to December 2023).

Thus, Volcano Berhad has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.4%.

See our latest analysis for Volcano Berhad

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

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Volcano Berhad's ROCE has reduced by 64% over the last five years, while the business employed 68% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Volcano Berhad probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Volcano Berhad's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 30% over the last three years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 2 warning signs for Volcano Berhad that we think you should be aware of.

While Volcano Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.