VAT Group's (VTX:VACN) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, VAT Group (VTX:VACN) looks quite promising in regards to its trends of return on capital.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on VAT Group is:

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

0.19 = CHF159m ÷ (CHF1.0b - CHF168m) (Based on the trailing twelve months to December 2020).

Thus, VAT Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Machinery industry.

View our latest analysis for VAT Group

Above you can see how the current ROCE for VAT 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 VAT Group here for free.

The Trend Of ROCE

VAT Group's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 70% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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.

In Conclusion...

In summary, we're delighted to see that VAT Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 434% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

VAT Group does have some risks though, and we've spotted 2 warning signs for VAT Group that you might be interested in.

While VAT Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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