Returns On Capital At Vitasoy International Holdings (HKG:345) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Vitasoy International Holdings (HKG:345), we weren't too hopeful.

Understanding 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. The formula for this calculation on Vitasoy International Holdings is:

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).

Therefore, Vitasoy International Holdings has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Food industry average of 8.8%.

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 analyst report for Vitasoy International Holdings .

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Vitasoy International Holdings, given the returns are trending downwards. About five years ago, returns on capital were 29%, however they're now substantially lower than that as we saw above. 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 side note, Vitasoy International Holdings' current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, it's unfortunate that Vitasoy International Holdings is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 82% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Vitasoy International Holdings that you might find interesting.

While Vitasoy International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.