The Return Trends At Viohalco (EBR:VIO) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Viohalco (EBR:VIO) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Viohalco is:

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

0.053 = €138m ÷ (€4.2b - €1.6b) (Based on the trailing twelve months to December 2020).

So, Viohalco has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.0%.

See our latest analysis for Viohalco

Historical performance is a great place to start when researching a stock so above you can see the gauge for Viohalco's ROCE against it's prior returns. If you'd like to look at how Viohalco has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Viohalco is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 74% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Viohalco's ROCE

In summary, we're delighted to see that Viohalco has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 259% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Viohalco can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Viohalco (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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