Is Vidhi Specialty Food Ingredients (NSE:VIDHIING) Likely To Turn Things Around?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, while the ROCE is currently high for Vidhi Specialty Food Ingredients (NSE:VIDHIING), we aren't jumping out of our chairs because returns are decreasing.

Return On Capital Employed (ROCE): What is it?

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 Vidhi Specialty Food Ingredients, this is the formula:

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

0.32 = ₹438m ÷ (₹1.6b - ₹239m) (Based on the trailing twelve months to September 2020).

Thus, Vidhi Specialty Food Ingredients has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 14%.

View our latest analysis for Vidhi Specialty Food Ingredients

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Vidhi Specialty Food Ingredients' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Vidhi Specialty Food Ingredients Tell Us?

On the surface, the trend of ROCE at Vidhi Specialty Food Ingredients doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 42% where it was five years ago. However it looks like Vidhi Specialty Food Ingredients might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Vidhi Specialty Food Ingredients has done well to pay down its current liabilities to 15% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Vidhi Specialty Food Ingredients' ROCE

Bringing it all together, while we're somewhat encouraged by Vidhi Specialty Food Ingredients' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 36% over the last three 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 3 warning signs for Vidhi Specialty Food Ingredients that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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