VRL Logistics (NSE:VRLLOG) Has Some Difficulty Using Its Capital Effectively

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at VRL Logistics (NSE:VRLLOG), so let's see why.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.062 = ₹558m ÷ (₹11b - ₹2.2b) (Based on the trailing twelve months to December 2020).

So, VRL Logistics has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Transportation industry average of 9.1%.

View 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 want to delve into the historical earnings, revenue and cash flow of VRL Logistics, check out these free graphs here.

So How Is VRL Logistics' ROCE Trending?

In terms of VRL Logistics' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 27%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect VRL Logistics to turn into a multi-bagger.

What We Can Learn From VRL Logistics' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 39% 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 final note, you should learn about the 4 warning signs we've spotted with VRL Logistics (including 1 which is a bit unpleasant) .

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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