Stock Analysis

Vodafone Qatar P.Q.S.C (DSM:VFQS) Is Experiencing Growth In Returns On Capital

DSM:VFQS
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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Vodafone Qatar P.Q.S.C's (DSM:VFQS) returns on capital, so let's have a look.

What Is 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. The formula for this calculation on Vodafone Qatar P.Q.S.C is:

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

0.088 = ر.ق483m ÷ (ر.ق7.0b - ر.ق1.5b) (Based on the trailing twelve months to September 2022).

So, Vodafone Qatar P.Q.S.C has an ROCE of 8.8%. Even though it's in line with the industry average of 8.8%, it's still a low return by itself.

Check out our latest analysis for Vodafone Qatar P.Q.S.C

roce
DSM:VFQS Return on Capital Employed January 24th 2023

In the above chart we have measured Vodafone Qatar P.Q.S.C's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Vodafone Qatar P.Q.S.C here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Vodafone Qatar P.Q.S.C is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 8.8% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 22% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Vodafone Qatar P.Q.S.C's ROCE

To sum it up, Vodafone Qatar P.Q.S.C is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 35% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing, we've spotted 1 warning sign facing Vodafone Qatar P.Q.S.C that you might find interesting.

While Vodafone Qatar P.Q.S.C isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Vodafone Qatar P.Q.S.C is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.