How Well Is V.S. International Group (HKG:1002) Allocating Its Capital?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into V.S. International Group (HKG:1002), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on V.S. International Group is:

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

0.0086 = CN¥3.4m ÷ (CN¥629m - CN¥231m) (Based on the trailing twelve months to July 2020).

Therefore, V.S. International Group has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.7%.

Check out our latest analysis for V.S. International Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for V.S. International Group's ROCE against it's prior returns. If you're interested in investigating V.S. International Group's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For V.S. International Group Tell Us?

The trend of ROCE at V.S. International Group is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 0.9% we see today. On top of that, the business is utilizing 27% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

What We Can Learn From V.S. International Group's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Long term shareholders who've owned the stock over the last five years have experienced a 56% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about V.S. International Group, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While V.S. International Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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