Here's What's Concerning About Vakrangee's (NSE:VAKRANGEE) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. However, after investigating Vakrangee (NSE:VAKRANGEE), 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 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 Vakrangee, this is the formula:

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

0.016 = ₹437m ÷ (₹29b - ₹2.1b) (Based on the trailing twelve months to June 2021).

Thus, Vakrangee has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

View our latest analysis for Vakrangee

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vakrangee's ROCE against it's prior returns. If you're interested in investigating Vakrangee's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Vakrangee Tell Us?

When we looked at the ROCE trend at Vakrangee, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.6% from 44% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Vakrangee has done well to pay down its current liabilities to 7.2% of total assets. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Vakrangee have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 64% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with Vakrangee (at least 1 which is concerning) , and understanding these would certainly be useful.

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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