The Returns At public stock company VSMPO-AVISMA (MCX:VSMO) Provide Us With Signs Of What's To Come

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating public stock company VSMPO-AVISMA (MCX:VSMO), we don't think it's current trends fit the mold of a multi-bagger.

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 public stock company VSMPO-AVISMA:

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

0.062 = ₽19b ÷ (₽353b - ₽46b) (Based on the trailing twelve months to June 2020).

So, public stock company VSMPO-AVISMA has an ROCE of 6.2%. On its own, that's a low figure but it's around the 7.6% average generated by the Metals and Mining industry.

View our latest analysis for public stock company VSMPO-AVISMA

Historical performance is a great place to start when researching a stock so above you can see the gauge for public stock company VSMPO-AVISMA's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of public stock company VSMPO-AVISMA, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at public stock company VSMPO-AVISMA doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 6.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, public stock company VSMPO-AVISMA has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 public stock company VSMPO-AVISMA's ROCE

Bringing it all together, while we're somewhat encouraged by public stock company VSMPO-AVISMA's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 156% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for public stock company VSMPO-AVISMA (of which 1 doesn't sit too well with us!) that you should know about.

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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