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Here's What's Concerning About V-Guard Industries' (NSE:VGUARD) Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at V-Guard Industries (NSE:VGUARD) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for V-Guard Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = ₹4.1b ÷ (₹32b - ₹11b) (Based on the trailing twelve months to September 2024).
So, V-Guard Industries has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 16%.
View our latest analysis for V-Guard Industries
Above you can see how the current ROCE for V-Guard Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering V-Guard Industries for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at V-Guard Industries doesn't inspire confidence. To be more specific, ROCE has fallen from 25% 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 V-Guard Industries' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that V-Guard Industries is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 100% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
V-Guard Industries does have some risks though, and we've spotted 1 warning sign for V-Guard Industries that you might be interested in.
While V-Guard Industries 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.
About NSEI:VGUARD
V-Guard Industries
Manufactures and sells electrical and electronic products in India and internationally.
Solid track record with excellent balance sheet and pays a dividend.