Capital Allocation Trends At Vtech Holdings (HKG:303) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Vtech Holdings (HKG:303), we aren't jumping out of our chairs because returns are decreasing.

Return On Capital Employed (ROCE): What is it?

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 Vtech Holdings is:

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

0.28 = US$262m ÷ (US$1.4b - US$523m) (Based on the trailing twelve months to March 2021).

Therefore, Vtech Holdings has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 7.0% earned by companies in a similar industry.

View our latest analysis for Vtech Holdings

In the above chart we have measured Vtech Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Vtech Holdings here for free.

So How Is Vtech Holdings' ROCE Trending?

When we looked at the ROCE trend at Vtech Holdings, we didn't gain much confidence. Historically returns on capital were even higher at 38%, but they have dropped over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Vtech Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Vtech Holdings' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 31% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

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

Vtech Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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.
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