Some Investors May Be Worried About Vikas Lifecare's (NSE:VIKASLIFE) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Vikas Lifecare (NSE:VIKASLIFE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Vikas Lifecare, this is the formula:

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

0.025 = ₹88m ÷ (₹4.5b - ₹1.1b) (Based on the trailing twelve months to March 2023).

So, Vikas Lifecare has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.6%.

Check out our latest analysis for Vikas Lifecare

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vikas Lifecare's ROCE against it's prior returns. If you'd like to look at how Vikas Lifecare has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Vikas Lifecare

How Are Returns Trending?

When we looked at the ROCE trend at Vikas Lifecare, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.3% 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.

On a side note, Vikas Lifecare has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Vikas Lifecare's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Vikas Lifecare is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 0.2% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a separate note, we've found 2 warning signs for Vikas Lifecare you'll probably want to know about.

While Vikas Lifecare 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.