There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Vision Values Holdings (HKG:862) so let's look a bit deeper.
We've discovered 2 warning signs about Vision Values Holdings. View them for free.What Is Return On Capital Employed (ROCE)?
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 Vision Values Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = HK$19m ÷ (HK$644m - HK$228m) (Based on the trailing twelve months to December 2024).
Therefore, Vision Values Holdings has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the IT industry average of 6.1%.
Check out our latest analysis for Vision Values Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Vision Values Holdings' ROCE against it's prior returns. If you're interested in investigating Vision Values Holdings' past further, check out this free graph covering Vision Values Holdings' past earnings, revenue and cash flow.
So How Is Vision Values Holdings' ROCE Trending?
Shareholders will be relieved that Vision Values Holdings has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.6%, which is always encouraging. 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. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 35% of the business, which is more than it was five years ago. 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
In summary, we're delighted to see that Vision Values Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. However the stock is down a substantial 85% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
If you'd like to know more about Vision Values Holdings, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.
While Vision Values Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.