Returns On Capital At VT Industrial TechnologyLtd (SZSE:300707) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 VT Industrial TechnologyLtd (SZSE:300707), it didn't seem to tick all of these boxes.

Understanding 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. 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)

0.045 = CN¥69m ÷ (CN¥1.9b - CN¥324m) (Based on the trailing twelve months to March 2024).

Thus, VT Industrial TechnologyLtd has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.9%.

See our latest analysis for VT Industrial TechnologyLtd

Historical 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'd like to look at how VT Industrial TechnologyLtd has performed in the past in other metrics, you can view this free graph of VT Industrial TechnologyLtd's past earnings, revenue and cash flow.

So How Is VT Industrial TechnologyLtd's ROCE Trending?

We weren't thrilled with the trend because VT Industrial TechnologyLtd's ROCE has reduced by 56% over the last five years, while the business employed 132% more capital. Usually this isn't ideal, but given VT Industrial TechnologyLtd conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with VT Industrial TechnologyLtd's earnings and if they change as a result from the capital raise.

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. These growth trends haven't led to growth returns though, since the stock has fallen 18% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 2 warning signs with VT Industrial TechnologyLtd (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com