Stock Analysis

Some Investors May Be Worried About V-Guard Industries' (NSE:VGUARD) Returns On Capital

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NSEI:VGUARD
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at V-Guard Industries (NSE:VGUARD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for V-Guard Industries, this is the formula:

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

0.14 = ₹2.9b ÷ (₹30b - ₹8.5b) (Based on the trailing twelve months to September 2023).

Therefore, V-Guard Industries has an ROCE of 14%. In absolute terms, that's a pretty standard return but compared to the Electrical industry average it falls behind.

Check out our latest analysis for V-Guard Industries

roce
NSEI:VGUARD Return on Capital Employed November 29th 2023

In the above chart we have measured V-Guard Industries' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is V-Guard Industries' ROCE Trending?

In terms of V-Guard Industries' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 14%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On 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. Furthermore the stock has climbed 45% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching V-Guard Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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