Vietnam Manufacturing and Export Processing (Holdings) (HKG:422) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Vietnam Manufacturing and Export Processing (Holdings) (HKG:422) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Vietnam Manufacturing and Export Processing (Holdings):

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

0.025 = US$1.4m ÷ (US$124m - US$69m) (Based on the trailing twelve months to March 2023).

Therefore, Vietnam Manufacturing and Export Processing (Holdings) has an ROCE of 2.5%. Even though it's in line with the industry average of 2.5%, it's still a low return by itself.

View our latest analysis for Vietnam Manufacturing and Export Processing (Holdings)

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

What Does the ROCE Trend For Vietnam Manufacturing and Export Processing (Holdings) Tell Us?

Like most people, we're pleased that Vietnam Manufacturing and Export Processing (Holdings) is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 56%. Vietnam Manufacturing and Export Processing (Holdings) could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 56% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Vietnam Manufacturing and Export Processing (Holdings)'s ROCE

In a nutshell, we're pleased to see that Vietnam Manufacturing and Export Processing (Holdings) has been able to generate higher returns from less capital. And with a respectable 49% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Vietnam Manufacturing and Export Processing (Holdings) does have some risks though, and we've spotted 3 warning signs for Vietnam Manufacturing and Export Processing (Holdings) that you might be interested in.

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.