Here's What To Make Of Victory Supermarket Chain's (TLV:VCTR) Returns On Capital

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. However, after investigating Victory Supermarket Chain (TLV:VCTR), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Victory Supermarket Chain, this is the formula:

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

0.068 = ₪94m ÷ (₪1.9b - ₪555m) (Based on the trailing twelve months to September 2020).

Therefore, Victory Supermarket Chain has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 11%.

Check out our latest analysis for Victory Supermarket Chain

Historical performance is a great place to start when researching a stock so above you can see the gauge for Victory Supermarket Chain's ROCE against it's prior returns. If you're interested in investigating Victory Supermarket Chain's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Victory Supermarket Chain, we didn't gain much confidence. Around five years ago the returns on capital were 9.5%, but since then they've fallen to 6.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Victory Supermarket Chain has done well to pay down its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Victory Supermarket Chain. And the stock has done incredibly well with a 182% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Victory Supermarket Chain, we've discovered 1 warning sign that you should be aware of.

While Victory Supermarket Chain 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. 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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