Adval Tech Holding (VTX:ADVN) Has Some Difficulty Using Its Capital Effectively

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Adval Tech Holding (VTX:ADVN), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Adval Tech Holding, this is the formula:

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

0.038 = CHF4.9m ÷ (CHF164m - CHF35m) (Based on the trailing twelve months to June 2022).

So, Adval Tech Holding has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 16%.

View our latest analysis for Adval Tech Holding

Above you can see how the current ROCE for Adval Tech Holding 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 Adval Tech Holding here for free.

What Can We Tell From Adval Tech Holding's ROCE Trend?

In terms of Adval Tech Holding's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.7%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Adval Tech Holding to turn into a multi-bagger.

The Bottom Line On Adval Tech Holding's ROCE

In summary, it's unfortunate that Adval Tech Holding is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 38% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Adval Tech Holding does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.