Is VRL Logistics (NSE:VRLLOG) Struggling?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, VRL Logistics (NSE:VRLLOG) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for VRL Logistics, this is the formula:

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

0.038 = ₹342m ÷ (₹11b - ₹2.2b) (Based on the trailing twelve months to September 2020).

Therefore, VRL Logistics has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Transportation industry average of 9.2%.

Check out our latest analysis for VRL Logistics

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

So How Is VRL Logistics' ROCE Trending?

There is reason to be cautious about VRL Logistics, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 28% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect VRL Logistics to turn into a multi-bagger.

Our Take On VRL Logistics' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 47% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with VRL Logistics (at least 1 which is concerning) , and understanding these would certainly be useful.

While VRL Logistics 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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