We're Watching These Trends At Global Vectra Helicorp (NSE:GLOBALVECT)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Global Vectra Helicorp (NSE:GLOBALVECT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Global Vectra Helicorp, this is the formula:

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

0.069 = ₹286m ÷ (₹8.7b - ₹4.6b) (Based on the trailing twelve months to December 2019).

Thus, Global Vectra Helicorp has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 17%.

Check out our latest analysis for Global Vectra Helicorp

Historical performance is a great place to start when researching a stock so above you can see the gauge for Global Vectra Helicorp's ROCE against it's prior returns. If you'd like to look at how Global Vectra Helicorp has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Global Vectra Helicorp doesn't inspire confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 6.9%. However it looks like Global Vectra Helicorp might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Global Vectra Helicorp has done well to pay down its current liabilities to 53% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Global Vectra Helicorp's ROCE

Bringing it all together, while we're somewhat encouraged by Global Vectra Helicorp's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Global Vectra Helicorp has the makings of a multi-bagger.

Global Vectra Helicorp does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those don't sit too well with us...

While Global Vectra Helicorp 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. 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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