Vishal Fabrics (NSE:VISHAL) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Vishal Fabrics (NSE:VISHAL) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Vishal Fabrics is:

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

0.13 = ₹696m ÷ (₹8.6b - ₹3.2b) (Based on the trailing twelve months to September 2023).

Thus, Vishal Fabrics has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Luxury industry.

Check out our latest analysis for Vishal Fabrics

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

What The Trend Of ROCE Can Tell Us

Vishal Fabrics has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 66% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Vishal Fabrics' ROCE

To sum it up, Vishal Fabrics is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 11% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Vishal Fabrics does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

While Vishal Fabrics 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.