Returns On Capital Signal Tricky Times Ahead For VNET Group (NASDAQ:VNET)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at VNET Group (NASDAQ:VNET) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for VNET Group, this is the formula:

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

0.0043 = CN¥92m ÷ (CN¥30b - CN¥8.4b) (Based on the trailing twelve months to September 2024).

Thus, VNET Group has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

View our latest analysis for VNET Group

In the above chart we have measured VNET Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for VNET Group .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because VNET Group's ROCE has reduced by 80% over the last five years, while the business employed 107% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with VNET Group's earnings and if they change as a result from the capital raise.

The Bottom Line On VNET Group's ROCE

Bringing it all together, while we're somewhat encouraged by VNET Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 43% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

VNET Group does have some risks though, and we've spotted 2 warning signs for VNET Group that you might be interested in.

While VNET Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.