Here's What To Make Of V.S.T. Tillers Tractors' (NSE:VSTTILLERS) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at V.S.T. Tillers Tractors (NSE:VSTTILLERS) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on V.S.T. Tillers Tractors is:

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

0.075 = ₹505m ÷ (₹8.4b - ₹1.7b) (Based on the trailing twelve months to September 2020).

Therefore, V.S.T. Tillers Tractors has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.8%.

View our latest analysis for V.S.T. Tillers Tractors

Historical performance is a great place to start when researching a stock so above you can see the gauge for V.S.T. Tillers Tractors' ROCE against it's prior returns. If you're interested in investigating V.S.T. Tillers Tractors' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For V.S.T. Tillers Tractors Tell Us?

On the surface, the trend of ROCE at V.S.T. Tillers Tractors doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.5% from 21% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by V.S.T. Tillers Tractors' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 43% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

V.S.T. Tillers Tractors does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While V.S.T. Tillers Tractors 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. 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.
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