Grupo Vasconia (BMV:VASCONI) Has Some Difficulty Using Its Capital Effectively

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. 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 Grupo Vasconia (BMV:VASCONI), so let's see why.

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. Analysts use this formula to calculate it for Grupo Vasconia:

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

0.0019 = Mex$5.4m ÷ (Mex$4.3b - Mex$1.5b) (Based on the trailing twelve months to March 2021).

Thus, Grupo Vasconia has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 3.1%.

See our latest analysis for Grupo Vasconia

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Grupo Vasconia's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Grupo Vasconia's ROCE Trend?

We are a bit worried about the trend of returns on capital at Grupo Vasconia. About five years ago, returns on capital were 4.8%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Grupo Vasconia to turn into a multi-bagger.

On a side note, Grupo Vasconia's current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Grupo Vasconia's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 30% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing Grupo Vasconia we've found 2 warning signs (1 is concerning!) 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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