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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Vistar Holdings (HKG:8535), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Vistar Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = HK$25m ÷ (HK$223m - HK$90m) (Based on the trailing twelve months to December 2020).
So, Vistar Holdings has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 10% it's much better.
Check out our latest analysis for Vistar Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Vistar Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Vistar Holdings, check out these free graphs here.
What Does the ROCE Trend For Vistar Holdings Tell Us?
In terms of Vistar Holdings' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 47%, but since then they've fallen to 19%. However it looks like Vistar Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, Vistar Holdings has decreased its current liabilities to 40% 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. Keep in mind 40% is still pretty high, so those risks are still somewhat prevalent.
In Conclusion...
To conclude, we've found that Vistar Holdings is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 67% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a final note, we found 4 warning signs for Vistar Holdings (1 can't be ignored) you should be aware of.
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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About SEHK:8535
Vistar Holdings
An investment holding company, provides electrical and mechanical engineering services in Hong Kong.
Excellent balance sheet and fair value.
