If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Valuetronics Holdings (SGX:BN2) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Valuetronics Holdings is:

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

0.077 = HK$108m ÷ (HK$2.1b - HK$685m) (Based on the trailing twelve months to March 2024).

Thus, Valuetronics Holdings has an ROCE of 7.7%. In absolute terms, that's a low return but it's around the Electronic industry average of 8.6%.

View our latest analysis for Valuetronics Holdings

Above you can see how the current ROCE for Valuetronics Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Valuetronics Holdings .

What Can We Tell From Valuetronics Holdings' ROCE Trend?

In terms of Valuetronics Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.7% from 19% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

We're a bit apprehensive about Valuetronics Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 35% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Valuetronics Holdings does have some risks though, and we've spotted 1 warning sign for Valuetronics Holdings that you might be interested in.