Returns On Capital At Vijaya Diagnostic Centre (NSE:VIJAYA) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Vijaya Diagnostic Centre (NSE:VIJAYA), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Vijaya Diagnostic Centre:

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

0.16 = ₹1.2b ÷ (₹8.0b - ₹733m) (Based on the trailing twelve months to December 2022).

Therefore, Vijaya Diagnostic Centre has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Healthcare industry average of 13%.

View our latest analysis for Vijaya Diagnostic Centre

Above you can see how the current ROCE for Vijaya Diagnostic Centre compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Vijaya Diagnostic Centre.

The Trend Of ROCE

On the surface, the trend of ROCE at Vijaya Diagnostic Centre doesn't inspire confidence. Over the last three years, returns on capital have decreased to 16% from 21% three 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Vijaya Diagnostic Centre is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Vijaya Diagnostic Centre has the makings of a multi-bagger.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.