Will Vertical International Holdings (HKG:8375) Multiply In Value Going Forward?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at Vertical International Holdings (HKG:8375) and its ROCE trend, we weren't exactly thrilled.

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

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

0.0042 = HK$375k ÷ (HK$115m - HK$25m) (Based on the trailing twelve months to September 2020).

Therefore, Vertical International Holdings has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 8.1%.

View our latest analysis for Vertical International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vertical International Holdings' ROCE against it's prior returns. If you'd like to look at how Vertical International Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Vertical International Holdings doesn't inspire confidence. Around four years ago the returns on capital were 44%, but since then they've fallen to 0.4%. 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.

On a side note, Vertical International Holdings has done well to pay down its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Vertical International Holdings is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 77% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Vertical International Holdings has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Vertical International Holdings (including 2 which don't sit too well with us) .

While Vertical 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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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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