Zehnder Group (VTX:ZEHN) Shareholders Will Want The ROCE Trajectory To Continue

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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, Zehnder Group (VTX:ZEHN) looks quite promising in regards to its trends of return on capital.

What is 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 Zehnder Group is:

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

0.14 = €52m ÷ (€499m - €137m) (Based on the trailing twelve months to December 2020).

So, Zehnder Group has an ROCE of 14%. In absolute terms, that's a pretty standard return but compared to the Building industry average it falls behind.

See our latest analysis for Zehnder Group

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

What The Trend Of ROCE Can Tell Us

Zehnder 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 166% 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...

To sum it up, Zehnder Group is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 108% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Zehnder Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While Zehnder 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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