The Returns On Capital At Veto Switchgears and Cables (NSE:VETO) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Veto Switchgears and Cables (NSE:VETO) and its ROCE trend, we weren't exactly thrilled.

What Is 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)

0.16 = ₹396m ÷ (₹3.3b - ₹850m) (Based on the trailing twelve months to September 2022).

So, Veto Switchgears and Cables has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 14%.

Check out our latest analysis for Veto Switchgears and Cables

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 Veto Switchgears and Cables, check out these free graphs here.

What Does the ROCE Trend For Veto Switchgears and Cables Tell Us?

In terms of Veto Switchgears and Cables' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 23% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Veto Switchgears and Cables' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Veto Switchgears and Cables. These growth trends haven't led to growth returns though, since the stock has fallen 55% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 4 warning signs for Veto Switchgears and Cables (1 is a bit unpleasant) you should be aware of.

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.