Stock Analysis

Be Wary Of Vinda International Holdings (HKG:3331) And Its Returns On Capital

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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Vinda International Holdings (HKG:3331), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Vinda International Holdings:

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

0.052 = HK$807m ÷ (HK$24b - HK$8.8b) (Based on the trailing twelve months to December 2022).

Thus, Vinda International Holdings has an ROCE of 5.2%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

Check out our latest analysis for Vinda International Holdings

SEHK:3331 Return on Capital Employed March 15th 2023

In the above chart we have measured Vinda 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.

So How Is Vinda International Holdings' ROCE Trending?

There is reason to be cautious about Vinda International Holdings, given the returns are trending downwards. To be more specific, the ROCE was 7.2% 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 Vinda International Holdings to turn into a multi-bagger.

Our Take On Vinda International Holdings' ROCE

In summary, it's unfortunate that Vinda International Holdings is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 50% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for Vinda International Holdings you'll probably want to know about.

While Vinda International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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