The Returns On Capital At Vistar Holdings (HKG:8535) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Looking at Vistar Holdings (HKG:8535), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Vistar Holdings, this is the formula:

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

0.23 = HK$36m ÷ (HK$256m - HK$101m) (Based on the trailing twelve months to June 2022).

So, Vistar Holdings has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 7.0% earned by companies in a similar industry.

Our analysis indicates that 8535 is potentially undervalued!

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.

How Are Returns Trending?

On the surface, the trend of ROCE at Vistar Holdings doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 48%. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Vistar Holdings has decreased its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Vistar Holdings is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 31% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Vistar Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.