Capital Allocation Trends At Vaibhav Global (NSE:VAIBHAVGBL) Aren't Ideal

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Vaibhav Global (NSE:VAIBHAVGBL), 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. To calculate this metric for Vaibhav Global, this is the formula:

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

0.11 = ₹1.3b ÷ (₹18b - ₹5.2b) (Based on the trailing twelve months to June 2023).

Therefore, Vaibhav Global has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Luxury industry.

See our latest analysis for Vaibhav Global

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, revenue and cash flow of Vaibhav Global, check out these free graphs here.

What Can We Tell From Vaibhav Global's ROCE Trend?

In terms of Vaibhav Global's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 27% five years ago. However it looks like Vaibhav Global 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Vaibhav Global's ROCE

Bringing it all together, while we're somewhat encouraged by Vaibhav Global's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 251% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 1 warning sign for Vaibhav Global that we think you should be aware of.

While Vaibhav Global isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.