Does Vikas Proppant & Granite (NSE:VIKASPROP) Have The Makings Of A Multi-Bagger?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Vikas Proppant & Granite (NSE:VIKASPROP) and its trend of ROCE, we really liked what we saw.

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

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. To calculate this metric for Vikas Proppant & Granite, this is the formula:

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

0.033 = ₹66m ÷ (₹4.0b - ₹2.0b) (Based on the trailing twelve months to December 2020).

So, Vikas Proppant & Granite has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 15%.

View our latest analysis for Vikas Proppant & Granite

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 want to delve into the historical earnings, revenue and cash flow of Vikas Proppant & Granite, check out these free graphs here.

The Trend Of ROCE

Shareholders will be relieved that Vikas Proppant & Granite has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 3.3% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 51% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Vikas Proppant & Granite's ROCE

To bring it all together, Vikas Proppant & Granite has done well to increase the returns it's generating from its capital employed. Although the company may be facing some issues elsewhere since the stock has plunged 71% in the last year. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One more thing to note, we've identified 5 warning signs with Vikas Proppant & Granite and understanding them should be part of your investment process.

While Vikas Proppant & Granite may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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