Is Zumtobel Group (VIE:ZAG) Shrinking?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Zumtobel Group (VIE:ZAG), the trends above didn't look too great.

Understanding 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. The formula for this calculation on Zumtobel Group is:

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

0.053 = €34m ÷ (€969m - €327m) (Based on the trailing twelve months to October 2020).

Therefore, Zumtobel Group has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Electrical industry average of 10%.

View our latest analysis for Zumtobel Group

Above you can see how the current ROCE for Zumtobel Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zumtobel Group here for free.

The Trend Of ROCE

In terms of Zumtobel Group's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.2% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Zumtobel Group to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 57% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Zumtobel Group does have some risks though, and we've spotted 3 warning signs for Zumtobel Group that you might be interested in.

While Zumtobel Group 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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