Global Vectra Helicorp (NSE:GLOBALVECT) May Have Issues Allocating Its Capital

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Global Vectra Helicorp (NSE:GLOBALVECT), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Global Vectra Helicorp, this is the formula:

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

0.055 = ₹213m ÷ (₹8.7b - ₹4.8b) (Based on the trailing twelve months to September 2024).

So, Global Vectra Helicorp has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 8.7%.

Check out our latest analysis for Global Vectra Helicorp

Historical performance is a great place to start when researching a stock so above you can see the gauge for Global Vectra Helicorp's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Global Vectra Helicorp.

So How Is Global Vectra Helicorp's ROCE Trending?

We are a bit worried about the trend of returns on capital at Global Vectra Helicorp. Unfortunately the returns on capital have diminished from the 7.3% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Global Vectra Helicorp becoming one if things continue as they have.

On a separate but related note, it's important to know that Global Vectra Helicorp has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Global Vectra Helicorp's ROCE

In summary, it's unfortunate that Global Vectra Helicorp is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 397% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 2 warning signs with Global Vectra Helicorp (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.