Valiant Organics (NSE:VALIANTORG) Will Be Hoping To Turn Its Returns On Capital Around

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Valiant Organics (NSE:VALIANTORG), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Valiant Organics:

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

0.17 = ₹1.4b ÷ (₹12b - ₹3.9b) (Based on the trailing twelve months to March 2023).

Therefore, Valiant Organics has an ROCE of 17%. By itself that's a normal return on capital and it's in line with the industry's average returns of 17%.

View our latest analysis for Valiant Organics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Valiant Organics' ROCE against it's prior returns. If you're interested in investigating Valiant Organics' past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Valiant Organics

What Can We Tell From Valiant Organics' ROCE Trend?

When we looked at the ROCE trend at Valiant Organics, we didn't gain much confidence. To be more specific, ROCE has fallen from 38% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Valiant Organics' ROCE

Bringing it all together, while we're somewhat encouraged by Valiant Organics' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 19% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.