These Return Metrics Don't Make Van Elle Holdings (LON:VANL) Look Too Strong

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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Van Elle Holdings (LON:VANL), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Van Elle Holdings, this is the formula:

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

0.068 = UK£4.1m ÷ (UK£89m - UK£29m) (Based on the trailing twelve months to October 2023).

Thus, Van Elle Holdings has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 12%.

See our latest analysis for Van Elle Holdings

roce
AIM:VANL Return on Capital Employed February 5th 2024

In the above chart we have measured Van Elle Holdings' 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 report on analyst forecasts for the company.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Van Elle Holdings. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Van Elle Holdings to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Van Elle Holdings is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 40% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 3 warning signs facing Van Elle Holdings that you might find interesting.