The Returns On Capital At V-Guard Industries (NSE:VGUARD) Don't Inspire Confidence

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on V-Guard Industries is:

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

0.20 = ₹2.2b ÷ (₹15b - ₹4.3b) (Based on the trailing twelve months to December 2020).

So, V-Guard Industries has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 11% it's much better.

Check out our latest analysis for V-Guard Industries

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'd like, you can check out the forecasts from the analysts covering V-Guard Industries here for free.

What Does the ROCE Trend For V-Guard Industries Tell Us?

On the surface, the trend of ROCE at V-Guard Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 20% from 29% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for V-Guard Industries have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 165% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 1 warning sign for V-Guard Industries you'll probably want to know about.

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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