Vico International Holdings' (HKG:1621) Returns On Capital Not Reflecting Well On The Business

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Vico International Holdings (HKG:1621) and its ROCE trend, we weren't exactly thrilled.

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

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 Vico International Holdings is:

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

0.065 = HK$15m ÷ (HK$291m - HK$57m) (Based on the trailing twelve months to September 2024).

So, Vico International Holdings has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 6.5%.

View our latest analysis for Vico International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vico International Holdings' ROCE against it's prior returns. If you're interested in investigating Vico International Holdings' past further, check out this free graph covering Vico International Holdings' past earnings, revenue and cash flow.

What Can We Tell From Vico International Holdings' ROCE Trend?

On the surface, the trend of ROCE at Vico International Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.5% from 15% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Vico International Holdings' ROCE

While returns have fallen for Vico International Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 0.05% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Vico International Holdings does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Vico International Holdings 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.