Vedan International (Holdings) (HKG:2317) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Vedan International (Holdings) (HKG:2317), we weren't too upbeat about how things were going.

What Is 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. To calculate this metric for Vedan International (Holdings), this is the formula:

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

0.047 = US$14m ÷ (US$384m - US$82m) (Based on the trailing twelve months to December 2023).

Thus, Vedan International (Holdings) has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.6%.

See our latest analysis for Vedan International (Holdings)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vedan International (Holdings)'s ROCE against it's prior returns. If you're interested in investigating Vedan International (Holdings)'s past further, check out this free graph covering Vedan International (Holdings)'s past earnings, revenue and cash flow.

So How Is Vedan International (Holdings)'s ROCE Trending?

We are a bit worried about the trend of returns on capital at Vedan International (Holdings). To be more specific, the ROCE was 7.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Vedan International (Holdings) becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Vedan International (Holdings) is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 1.1% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Vedan International (Holdings) does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com