Some Investors May Be Worried About Flughafen Zürich's (VTX:FHZN) Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Flughafen Zürich (VTX:FHZN) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Flughafen Zürich is:

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

0.0039 = CHF19m ÷ (CHF5.0b - CHF229m) (Based on the trailing twelve months to December 2021).

Therefore, Flughafen Zürich has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 7.6%.

View our latest analysis for Flughafen Zürich

In the above chart we have measured Flughafen Zürich'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 Flughafen Zürich here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Flughafen Zürich doesn't inspire confidence. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 0.4%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

Our Take On Flughafen Zürich's ROCE

Bringing it all together, while we're somewhat encouraged by Flughafen Zürich's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 24% over the last five years, investors may not be too optimistic on this trend improving either. 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.

On a separate note, we've found 1 warning sign for Flughafen Zürich you'll probably want to know about.

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. 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.