V2 Retail (NSE:V2RETAIL) Could Be Struggling To Allocate Capital

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating V2 Retail (NSE:V2RETAIL), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for V2 Retail:

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

0.044 = ₹255m ÷ (₹7.9b - ₹2.2b) (Based on the trailing twelve months to June 2022).

Thus, V2 Retail has an ROCE of 4.4%. In absolute terms, that's a low return but it's around the Multiline Retail industry average of 5.0%.

See our latest analysis for V2 Retail

Historical performance is a great place to start when researching a stock so above you can see the gauge for V2 Retail's ROCE against it's prior returns. 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 4.4% from 24% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for V2 Retail in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 73% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

One more thing: We've identified 4 warning signs with V2 Retail (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.