To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at VT Industrial TechnologyLtd (SZSE:300707) 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?
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 VT Industrial TechnologyLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = CN¥72m ÷ (CN¥1.4b - CN¥244m) (Based on the trailing twelve months to March 2022).
Therefore, VT Industrial TechnologyLtd has an ROCE of 6.4%. Even though it's in line with the industry average of 5.8%, it's still a low return by itself.
Check out our latest analysis for VT Industrial TechnologyLtd
SZSE:300707 Return on Capital Employed June 28th 2022Historical performance is a great place to start when researching a stock so above you can see the gauge for VT Industrial TechnologyLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of VT Industrial TechnologyLtd, check out these free graphs here.
The Trend Of ROCE
In terms of VT Industrial TechnologyLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.4% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, VT Industrial TechnologyLtd has done well to pay down its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From VT Industrial TechnologyLtd's ROCE
While returns have fallen for VT Industrial TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 19% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
One more thing: We've identified 3 warning signs with VT Industrial TechnologyLtd (at least 2 which don't sit too well with us) , and understanding them would certainly be useful.
While VT Industrial TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.