What Do The Returns On Capital At Vindhya Telelinks (NSE:VINDHYATEL) Tell Us?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Vindhya Telelinks (NSE:VINDHYATEL), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Vindhya Telelinks is:

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

0.058 = ₹2.0b ÷ (₹46b - ₹12b) (Based on the trailing twelve months to September 2020).

Thus, Vindhya Telelinks has an ROCE of 5.8%. In absolute terms, that's a low return but it's around the Communications industry average of 6.7%.

Check out our latest analysis for Vindhya Telelinks

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

The Trend Of ROCE

In terms of Vindhya Telelinks' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.8% from 22% five years ago. 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, Vindhya Telelinks has decreased its current liabilities to 26% 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.

The Bottom Line On Vindhya Telelinks' ROCE

We're a bit apprehensive about Vindhya Telelinks because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 64% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing Vindhya Telelinks that you might find interesting.

While Vindhya Telelinks may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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