Investors Could Be Concerned With Vinda International Holdings' (HKG:3331) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? 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 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 Vinda International Holdings (HKG:3331), we weren't too hopeful.

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. To calculate this metric for Vinda International Holdings, this is the formula:

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

0.057 = HK$881m ÷ (HK$24b - HK$8.8b) (Based on the trailing twelve months to December 2022).

So, Vinda International Holdings has an ROCE of 5.7%. Even though it's in line with the industry average of 5.7%, it's still a low return by itself.

View our latest analysis for Vinda International Holdings

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.

What Can We Tell From Vinda International Holdings' ROCE Trend?

In terms of Vinda International Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.2% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Vinda International Holdings to turn into a multi-bagger.

What We Can Learn From Vinda International Holdings' ROCE

In summary, it's unfortunate that Vinda International Holdings is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 36% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we've found 1 warning sign for Vinda International Holdings that we think you should be aware of.

While Vinda 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.