Here's What To Make Of Veto Switchgears and Cables' (NSE:VETO) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Veto Switchgears and Cables (NSE:VETO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Veto Switchgears and Cables:

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

0.091 = ₹167m ÷ (₹2.1b - ₹295m) (Based on the trailing twelve months to September 2020).

So, Veto Switchgears and Cables has an ROCE of 9.1%. On its own, that's a low figure but it's around the 10% average generated by the Electrical industry.

See our latest analysis for Veto Switchgears and Cables

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

So How Is Veto Switchgears and Cables' ROCE Trending?

When we looked at the ROCE trend at Veto Switchgears and Cables, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 9.1%. 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.

On a related note, Veto Switchgears and Cables has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. 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

From the above analysis, we find it rather worrisome that returns on capital and sales for Veto Switchgears and Cables have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 6.2% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Veto Switchgears and Cables we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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