Is Vmoto (ASX:VMT) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Vmoto (ASX:VMT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Vmoto:

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

0.054 = AU$1.3m ÷ (AU$32m - AU$8.2m) (Based on the trailing twelve months to June 2020).

So, Vmoto has an ROCE of 5.4%. Even though it's in line with the industry average of 5.1%, it's still a low return by itself.

Check out our latest analysis for Vmoto

roce

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Vmoto, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're a bit concerned with the trends, because the business is applying 34% less capital than it was five years ago and returns on that capital have stayed flat. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 5.4%, it's hard to get excited about these developments.

The Key Takeaway

It's a shame to see that Vmoto is effectively shrinking in terms of its capital base. Although the market must be expecting these trends to improve because the stock has gained 79% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 3 warning signs with Vmoto and understanding these should be part of your investment process.

While Vmoto 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.

This article by Simply Wall St is general in nature. 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.

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