Investors Could Be Concerned With V-MARC India's (NSE:VMARCIND) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Looking at V-MARC India (NSE:VMARCIND), it does have a high ROCE right now, but lets see how returns are trending.

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-MARC India:

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

0.24 = ₹316m ÷ (₹3.4b - ₹2.1b) (Based on the trailing twelve months to September 2023).

Therefore, V-MARC India has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Electrical industry average of 18%.

Check out our latest analysis for V-MARC India

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of V-MARC India.

What The Trend Of ROCE Can Tell Us

In terms of V-MARC India's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 37%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, V-MARC India has decreased its current liabilities to 61% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 61% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On V-MARC India's 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-MARC India. And the stock has done incredibly well with a 112% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about V-MARC India, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

V-MARC India is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.