What Can The Trends At Veson Holdings (HKG:1399) Tell Us About Their Returns?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Veson Holdings (HKG:1399) so let's look a bit deeper.

What is 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. The formula for this calculation on Veson Holdings is:

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

0.059 = CN¥65m ÷ (CN¥4.4b - CN¥3.3b) (Based on the trailing twelve months to June 2020).

Thus, Veson Holdings has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.9%.

See 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 want to delve into the historical earnings, revenue and cash flow of Veson Holdings, check out these free graphs here.

What Does the ROCE Trend For Veson Holdings Tell Us?

Veson Holdings' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 113% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a separate but related note, it's important to know that Veson Holdings has a current liabilities to total assets ratio of 75%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To sum it up, Veson Holdings is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 21% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Veson Holdings (of which 2 are a bit unpleasant!) that 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. 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.
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