Is V2 Retail (NSE:V2RETAIL) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 V2 Retail (NSE:V2RETAIL) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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 V2 Retail, this is the formula:

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

0.0043 = ₹22m ÷ (₹6.2b - ₹1.1b) (Based on the trailing twelve months to September 2020).

Thus, V2 Retail has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 5.6%.

Check out our latest analysis for V2 Retail

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 V2 Retail, check out these free graphs here.

What Can We Tell From V2 Retail's ROCE Trend?

When we looked at the ROCE trend at V2 Retail, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.4% from 9.6% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, V2 Retail has decreased its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On V2 Retail's ROCE

We're a bit apprehensive about V2 Retail because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with V2 Retail (including 1 which is can't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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