What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Vikas Proppant & Granite (NSE:VIKASPROP) so let's look a bit deeper.
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. Analysts use this formula to calculate it for Vikas Proppant & Granite:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0013 = ₹2.4m ÷ (₹3.9b - ₹2.0b) (Based on the trailing twelve months to March 2021).
Therefore, Vikas Proppant & Granite has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 17%.
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 Vikas Proppant & Granite's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Vikas Proppant & Granite's ROCE Trending?
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 0.1% 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. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 51% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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.
The Bottom Line
In summary, we're delighted to see that Vikas Proppant & Granite has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 33% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing to note, we've identified 3 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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.