We're Watching These Trends At Vakrangee (NSE:VAKRANGEE)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Vakrangee (NSE:VAKRANGEE), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Vakrangee is:

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

0.0068 = ₹180m ÷ (₹29b - ₹2.2b) (Based on the trailing twelve months to September 2020).

Thus, Vakrangee has an ROCE of 0.7%. 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 want to delve into the historical earnings, revenue and cash flow of Vakrangee, check out these free graphs here.

What Can We Tell From Vakrangee's ROCE Trend?

In terms of Vakrangee's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 42%, but since then they've fallen to 0.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Vakrangee has done well to pay down its current liabilities to 7.7% 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.

What We Can Learn From Vakrangee's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Vakrangee. However, despite the promising trends, the stock has fallen 30% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Vakrangee we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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. 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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