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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Although, when we looked at V2 Retail (NSE:V2RETAIL), it didn’t seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on V2 Retail is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0015 = ₹8.5m ÷ (₹8.1b – ₹2.5b) (Based on the trailing twelve months to December 2021).
Therefore, V2 Retail has an ROCE of 0.2%. In absolute terms, that’s a low return and it also under-performs the Multiline Retail industry average of 5.5%.
Check out our latest analysis for V2 Retail
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 want to delve into the historical earnings, revenue and cash flow of V2 Retail, check out these free graphs here.
The Trend Of ROCE
In terms of V2 Retail’s historical ROCE movements, the trend isn’t fantastic. Around five years ago the returns on capital were 15%, but since then they’ve fallen to 0.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In Conclusion…
While returns have fallen for V2 Retail in recent times, we’re encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven’t led to growth returns though, since the stock has fallen 17% over the last five years. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.
V2 Retail does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.
While V2 Retail 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.
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