Be Wary Of Vitasoy International Holdings (HKG:345) And Its Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Vitasoy International Holdings (HKG:345), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Vitasoy International Holdings:

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

0.0097 = HK$32m ÷ (HK$5.7b - HK$2.4b) (Based on the trailing twelve months to September 2023).

Thus, Vitasoy International Holdings has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.3%.

Check out our latest analysis for Vitasoy International Holdings

In the above chart we have measured Vitasoy International Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

There is reason to be cautious about Vitasoy International Holdings, given the returns are trending downwards. To be more specific, the ROCE was 29% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Vitasoy International Holdings to turn into a multi-bagger.

On a separate but related note, it's important to know that Vitasoy International Holdings has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Vitasoy International Holdings' ROCE

In summary, it's unfortunate that Vitasoy International Holdings is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 80% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Vitasoy International Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.