Vidhi Specialty Food Ingredients (NSE:VIDHIING) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So while Vidhi Specialty Food Ingredients (NSE:VIDHIING) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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

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 Vidhi Specialty Food Ingredients:

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

0.34 = ₹477m ÷ (₹1.6b - ₹239m) (Based on the trailing twelve months to December 2020).

So, Vidhi Specialty Food Ingredients has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 15%.

Check out 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. While it's comforting that the ROCE is high, five years ago it was 45%. 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.

On a related note, Vidhi Specialty Food Ingredients has decreased 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Vidhi Specialty Food Ingredients' ROCE

In summary, Vidhi Specialty Food Ingredients is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 219% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 2 warning signs facing Vidhi Specialty Food Ingredients that you might find interesting.

Vidhi Specialty Food Ingredients is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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