Be Wary Of V-MARC India (NSE:VMARCIND) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at V-MARC India (NSE:VMARCIND), it didn't seem to tick all of these boxes.

What is 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. The formula for this calculation on V-MARC India is:

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

0.15 = ₹121m ÷ (₹1.9b - ₹1.1b) (Based on the trailing twelve months to March 2022).

Therefore, V-MARC India has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 12% generated by the Electrical industry.

See our latest analysis for V-MARC India

Historical performance is a great place to start when researching a stock so above you can see the gauge for V-MARC India's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of V-MARC India, check out these free graphs here.

What Can We Tell From V-MARC India's ROCE Trend?

On the surface, the trend of ROCE at V-MARC India doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 31% five years ago. However it looks like V-MARC India might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, V-MARC India has decreased its current liabilities to 57% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 57% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

In summary, V-MARC India is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 13% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing V-MARC India, we've discovered 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.