Chocoladefabriken Lindt & Sprüngli (VTX:LISN) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Chocoladefabriken Lindt & Sprüngli (VTX:LISN), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Chocoladefabriken Lindt & Sprüngli:

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

0.065 = CHF439m ÷ (CHF8.1b - CHF1.3b) (Based on the trailing twelve months to December 2020).

Therefore, Chocoladefabriken Lindt & Sprüngli has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Food industry average of 7.6%.

See our latest analysis for Chocoladefabriken Lindt & Sprüngli

In the above chart we have measured Chocoladefabriken Lindt & Sprüngli's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Chocoladefabriken Lindt & Sprüngli here for free.

The Trend Of ROCE

In terms of Chocoladefabriken Lindt & Sprüngli's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.5% from 9.8% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Chocoladefabriken Lindt & Sprüngli's ROCE

In summary, we're somewhat concerned by Chocoladefabriken Lindt & Sprüngli's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 55% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Chocoladefabriken Lindt & Sprüngli could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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. 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.
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