Investors Will Want Avolta's (VTX:AVOL) Growth In ROCE To Persist

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Avolta's (VTX:AVOL) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Avolta, this is the formula:

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

0.071 = CHF877m ÷ (CHF17b - CHF4.1b) (Based on the trailing twelve months to December 2023).

So, Avolta has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 10%.

Check out our latest analysis for Avolta

Above you can see how the current ROCE for Avolta compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Avolta .

So How Is Avolta's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 7.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Avolta has. Astute investors may have an opportunity here because the stock has declined 52% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 3 warning signs for Avolta (1 doesn't sit too well with us) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.