Investors Will Want Vision Values Holdings' (HKG:862) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Vision Values Holdings (HKG:862) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Vision Values Holdings is:

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

0.02 = HK$8.6m ÷ (HK$634m - HK$201m) (Based on the trailing twelve months to June 2023).

Therefore, Vision Values Holdings has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the IT industry average of 7.3%.

View our latest analysis for Vision Values Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Vision Values Holdings, check out these free graphs here.

The Trend Of ROCE

Like most people, we're pleased that Vision Values Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 2.0% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 22%. Vision Values Holdings could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 32% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Vision Values Holdings' ROCE

In summary, it's great to see that Vision Values Holdings has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 88% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing: We've identified 3 warning signs with Vision Values Holdings (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.

While Vision Values 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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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.