Here's What's Concerning About IVF Hartmann Holding's (VTX:VBSN) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 IVF Hartmann Holding (VTX:VBSN), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on IVF Hartmann Holding is:

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

0.05 = CHF7.0m ÷ (CHF173m - CHF32m) (Based on the trailing twelve months to December 2021).

Therefore, IVF Hartmann Holding has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.7%.

View our latest analysis for IVF Hartmann Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for IVF Hartmann Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of IVF Hartmann Holding, check out these free graphs here.

What Does the ROCE Trend For IVF Hartmann Holding Tell Us?

On the surface, the trend of ROCE at IVF Hartmann Holding doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 5.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From IVF Hartmann Holding's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for IVF Hartmann Holding have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 44% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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

While IVF Hartmann Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.