Visaka Industries (NSE:VISAKAIND) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Visaka Industries (NSE:VISAKAIND) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Visaka Industries, this is the formula:

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

0.018 = ₹174m ÷ (₹14b - ₹4.9b) (Based on the trailing twelve months to September 2024).

Thus, Visaka Industries has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 7.0%.

Check out our latest analysis for Visaka Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Visaka Industries' ROCE against it's prior returns. If you'd like to look at how Visaka Industries has performed in the past in other metrics, you can view this free graph of Visaka Industries' past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Visaka Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.8% from 15% five years ago. However it looks like Visaka Industries 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'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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Visaka Industries' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 103% 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 3 warning signs facing Visaka Industries that you might find interesting.

While Visaka Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.