Adval Tech Holding (VTX:ADVN) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Adval Tech Holding (VTX:ADVN) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

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).

Therefore, 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%.

Our analysis indicates that ADVN is potentially overvalued!

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 to see what analysts are forecasting going forward, you should check out our free report for Adval Tech Holding.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Adval Tech Holding. To be more specific, the ROCE was 8.7% five years ago, but since then it has dropped noticeably. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Adval Tech Holding becoming one if things continue as they have.

What We Can Learn From 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 32% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Adval Tech Holding (of which 1 can't be ignored!) that you should know about.

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.