We Like These Underlying Return On Capital Trends At Vascon Engineers (NSE:VASCONEQ)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Vascon Engineers (NSE:VASCONEQ) looks quite promising in regards to its trends of return on capital.

Understanding 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 Vascon Engineers, this is the formula:

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

0.05 = ₹552m ÷ (₹19b - ₹7.7b) (Based on the trailing twelve months to March 2024).

Thus, Vascon Engineers has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 15%.

See 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 , check out these free graphs detailing revenue and cash flow performance of Vascon Engineers.

So How Is Vascon Engineers' ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 28%. So we're very much inspired by what we're seeing at Vascon Engineers thanks to its ability to profitably reinvest capital.

On a side note, Vascon Engineers' current liabilities are still rather high at 41% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Vascon Engineers' ROCE

In summary, it's great to see that Vascon Engineers can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 403% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Vascon Engineers can keep these trends up, it could have a bright future ahead.

Like most companies, Vascon Engineers does come with some risks, and we've found 4 warning signs that you should be aware of.

While Vascon Engineers 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. 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.