Investors Could Be Concerned With V-Mart Retail's (NSE:VMART) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at V-Mart Retail (NSE:VMART), it didn't seem to tick all of these boxes.

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 V-Mart Retail:

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

0.021 = ₹282m ÷ (₹16b - ₹2.6b) (Based on the trailing twelve months to March 2021).

So, V-Mart Retail has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Multiline Retail industry average of 5.6%.

Check out our latest analysis for V-Mart 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're interested in investigating V-Mart Retail's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For V-Mart Retail Tell Us?

When we looked at the ROCE trend at V-Mart Retail, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, V-Mart Retail has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On V-Mart Retail's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for V-Mart Retail have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 468% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

V-Mart Retail does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While V-Mart Retail 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. 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.
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