The Return Trends At V.S. International Group (HKG:1002) Look Promising

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at V.S. International Group (HKG:1002) and its trend of ROCE, we really liked what we saw.

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. 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)

0.0091 = CN¥3.5m ÷ (CN¥492m - CN¥102m) (Based on the trailing twelve months to July 2021).

Thus, 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 10.0%.

View 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 Can We Tell From V.S. International Group's ROCE Trend?

Shareholders will be relieved that V.S. International Group has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.9% on its capital. While returns have increased, the amount of capital employed by V.S. International Group has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

One more thing to note, V.S. International Group has decreased current liabilities to 21% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that V.S. International Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On V.S. International Group's ROCE

As discussed above, V.S. International Group appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 61% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

V.S. International Group does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

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.