Is Vesuvius India (NSE:VESUVIUS) Likely To Turn Things Around?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Vesuvius India (NSE:VESUVIUS), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Vesuvius India is:

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

0.068 = ₹577m ÷ (₹9.9b - ₹1.4b) (Based on the trailing twelve months to September 2020).

Thus, Vesuvius India has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.6%.

View our latest analysis for Vesuvius India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vesuvius India's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Vesuvius India, check out these free graphs here.

The Trend Of ROCE

In terms of Vesuvius India's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.8% from 20% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Vesuvius India have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 59% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Vesuvius India we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Vesuvius India 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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