If you're looking for a multi-bagger, there's a few things to 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at V-Guard Industries (NSE:VGUARD), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)
0.12 = ₹2.6b ÷ (₹29b - ₹8.2b) (Based on the trailing twelve months to March 2023).
So, V-Guard Industries has an ROCE of 12%. 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 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 to see what analysts are forecasting going forward, you should check out our free report for V-Guard Industries.
SWOT Analysis for V-Guard Industries
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Electrical market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the Indian market.
- Revenue is forecast to grow slower than 20% per year.
What Can We Tell From V-Guard Industries' ROCE Trend?
When we looked at the ROCE trend at V-Guard Industries, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On V-Guard Industries' 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 V-Guard Industries. These trends are starting to be recognized by investors since the stock has delivered a 38% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
On a separate note, we've found 1 warning sign for V-Guard Industries you'll probably want to know about.
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.
