[ad_1]
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Vishal Fabrics’ (NSE:VISHAL) 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. The formula for this calculation on Vishal Fabrics is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.26 = ₹1.3b ÷ (₹8.8b – ₹3.7b) (Based on the trailing twelve months to March 2022).
So, Vishal Fabrics has an ROCE of 26%. That’s a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
Check out our latest analysis for Vishal Fabrics
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 Vishal Fabrics’ past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Vishal Fabrics’ ROCE Trend?
The trends we’ve noticed at Vishal Fabrics are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 26%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 76%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
Another thing to note, Vishal Fabrics has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that’s what Vishal Fabrics has. Since the stock has returned a solid 33% to shareholders over the last year, it’s fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we’ve found 4 warning signs for Vishal Fabrics that we think you should be aware of.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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.
[ad_2]
Source link
