There Are Reasons To Feel Uneasy About VATS Liquor Chain Store Management's (SZSE:300755) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think VATS Liquor Chain Store Management (SZSE:300755) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding 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. To calculate this metric for VATS Liquor Chain Store Management, this is the formula:

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

0.041 = CN¥153m ÷ (CN¥6.9b - CN¥3.1b) (Based on the trailing twelve months to September 2024).

Therefore, VATS Liquor Chain Store Management has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 5.6%.

Check out our latest analysis for VATS Liquor Chain Store Management

In the above chart we have measured VATS Liquor Chain Store Management's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for VATS Liquor Chain Store Management .

So How Is VATS Liquor Chain Store Management's ROCE Trending?

On the surface, the trend of ROCE at VATS Liquor Chain Store Management doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like VATS Liquor Chain Store Management 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 may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 45%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 4.1%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On VATS Liquor Chain Store Management's ROCE

In summary, VATS Liquor Chain Store Management is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing VATS Liquor Chain Store Management we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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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.