Return on investment at VST Tillers Tractors (NSE: VSTTILLERS) paint a worrying picture
What are the underlying trends we should look for in a company to find a multi-bagger stock? Ideally, a company has two trends; first, a growing one return on the capital employed (ROCE) and, secondly, an increasing one be of the capital employed. Basically, this means that a company has profitable initiatives that it can continue to reinvest in, which is a characteristic of a compounding machine. Though when we looked at each other VST drawbar tractors (NSE: VSTTILLERS), it didn’t seem to check all of those boxes.
What is return on investment (ROCE)?
For those unsure of what ROCE is, it measures the amount of pre-tax profit a company can make from the capital invested in its business. The formula for this calculation for VST Tillers tractors is:
Return on capital employed = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.12 = ₹ 868m ÷ (₹ 8.9b – ₹ 1.7b) (Based on the last twelve months through June 2021).
So, VST Tillers Tractors has a ROCE of 12%. That is a relatively normal return on investment and is around 14% that the machine industry generates.
Check out our latest analysis for VST Tillers Tractors
Although the past is not representative of the future, it can be helpful to know how a company has performed in the past. That is why we have this graphic above. If you are interested in further researching the history of VST Tillers Tractors, this is the place to be for free Graph of past earnings, sales and cash flows.
What the ROCE trend can tell us
On the surface, the ROCE trend does not inspire confidence at VST Tillers Tractors. More precisely, the ROCE has fallen by 20% over the past five years. Although both sales and the number of assets used in the business have increased, this could indicate the company is investing in growth and the additional capital has resulted in a short-term decrease in ROCE. If these investments prove successful, it can be a good sign of long-term stock performance.
The bottom line
Although VST Tillers Tractors’ returns have been falling lately, we can see that sales are growing and the company is reinvesting in its operations. Additionally, the stock is up 66% over the past five years, it seems that investors are optimistic about the future. Even though the underlying trends have already been taken into account by investors, we still believe that this stock should be further investigated.
One more thing: we have identified 3 warning signs with VST Tillers Tractors (at least 1 which doesn’t suit us very well), and it would certainly be useful to understand these.
For those who like to invest solid companies, look at that for free List of companies with solid balance sheets and high returns on equity.
This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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