Vardhman Textiles' (NSE:VTL) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 Vardhman Textiles (NSE:VTL), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Vardhman Textiles, this is the formula:

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

0.094 = ₹9.5b ÷ (₹117b - ₹14b) (Based on the trailing twelve months to December 2024).

So, Vardhman Textiles has an ROCE of 9.4%. In absolute terms, that's a low return but it's around the Luxury industry average of 12%.

Check out our latest analysis for Vardhman Textiles

In the above chart we have measured Vardhman Textiles' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Vardhman Textiles for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Vardhman Textiles. Over the past five years, ROCE has remained relatively flat at around 9.4% and the business has deployed 39% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Vardhman Textiles' ROCE

In summary, Vardhman Textiles has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 95% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

While Vardhman Textiles 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.