Returns On Capital Signal Tricky Times Ahead For Veson Holdings (HKG:1399)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Veson Holdings (HKG:1399) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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 Veson Holdings is:

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

0.063 = CN¥84m ÷ (CN¥4.3b - CN¥3.0b) (Based on the trailing twelve months to June 2024).

So, Veson Holdings has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

View our latest analysis for Veson Holdings

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

The Trend Of ROCE

When we looked at the ROCE trend at Veson Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 8.4%, but since then they've fallen to 6.3%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Veson Holdings' current liabilities are still rather high at 69% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Veson Holdings' reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Veson Holdings, we've spotted 3 warning signs, and 1 of them is concerning.

While Veson Holdings 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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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.