If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Vicon Holdings (HKG:3878) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
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 Vicon Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = HK$42m ÷ (HK$541m - HK$173m) (Based on the trailing twelve months to September 2020).
Thus, Vicon Holdings has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Construction industry average of 10%.
View our latest analysis for Vicon Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Vicon Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Vicon Holdings, check out these free graphs here.
How Are Returns Trending?
When we looked at the ROCE trend at Vicon Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 11% from 42% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Vicon Holdings has decreased its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Vicon Holdings. Despite these promising trends, the stock has collapsed 86% over the last three years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.
If you'd like to know more about Vicon Holdings, we've spotted 5 warning signs, and 1 of them is concerning.
While Vicon 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. 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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About SEHK:3878
Vicon Holdings
An investment holding company, engages in the provision of foundation works and ancillary services in Hong Kong.
Flawless balance sheet with acceptable track record.
