The Returns On Capital At Vanov Holdings (HKG:2260) 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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Vanov Holdings (HKG:2260) and its ROCE trend, we weren't exactly thrilled.

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 Vanov Holdings:

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

0.10 = CN¥61m ÷ (CN¥740m - CN¥138m) (Based on the trailing twelve months to June 2023).

So, Vanov Holdings has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Luxury industry.

Check out our latest analysis for Vanov Holdings

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

So How Is Vanov Holdings' ROCE Trending?

When we looked at the ROCE trend at Vanov Holdings, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 10% from 41% four years ago. However it looks like Vanov 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 side note, Vanov Holdings has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Vanov Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 85% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 3 warning signs we've spotted with Vanov Holdings (including 2 which are a bit concerning) .

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. 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.