Returns On Capital Signal Difficult Times Ahead For Vascon Engineers (NSE:VASCONEQ)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. In light of that, from a first glance at Vascon Engineers (NSE:VASCONEQ), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Vascon Engineers, this is the formula:

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

0.0021 = ₹16m ÷ (₹14b - ₹6.0b) (Based on the trailing twelve months to December 2021).

So, Vascon Engineers has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.9%.

Check out our latest analysis for Vascon Engineers

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 Vascon Engineers, check out these free graphs here.

What Does the ROCE Trend For Vascon Engineers Tell Us?

There is reason to be cautious about Vascon Engineers, given the returns are trending downwards. About five years ago, returns on capital were 1.9%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Vascon Engineers becoming one if things continue as they have.

Another thing to note, Vascon Engineers has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Vascon Engineers' ROCE

In summary, it's unfortunate that Vascon Engineers is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 42% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 3 warning signs with Vascon Engineers and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.