V-ZUG Holding (VTX:VZUG) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at V-ZUG Holding (VTX:VZUG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 V-ZUG Holding, this is the formula:

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

0.061 = CHF29m ÷ (CHF620m - CHF139m) (Based on the trailing twelve months to June 2022).

Therefore, V-ZUG Holding has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 11%.

See our latest analysis for V-ZUG Holding

In the above chart we have measured V-ZUG Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for V-ZUG Holding.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at V-ZUG Holding doesn't inspire confidence. Around four years ago the returns on capital were 20%, but since then they've fallen to 6.1%. However it looks like V-ZUG Holding might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From V-ZUG Holding's ROCE

To conclude, we've found that V-ZUG Holding is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 42% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

V-ZUG Holding does have some risks though, and we've spotted 1 warning sign for V-ZUG Holding that you might be interested in.

While V-ZUG Holding 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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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.