Slowing Rates Of Return At Vitesco Technologies Group (ETR:VTSC) Leave Little Room For Excitement

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Vitesco Technologies Group (ETR:VTSC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Vitesco Technologies Group is:

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

0.027 = €116m ÷ (€7.7b - €3.5b) (Based on the trailing twelve months to March 2023).

So, Vitesco Technologies Group has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 9.1%.

See our latest analysis for Vitesco Technologies Group

In the above chart we have measured Vitesco Technologies Group'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 Vitesco Technologies Group here for free.

How Are Returns Trending?

Over the past four years, Vitesco Technologies Group's ROCE has remained relatively flat while the business is using 23% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 2.7%, it's hard to get excited about these developments.

On a separate but related note, it's important to know that Vitesco Technologies Group has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, Vitesco Technologies Group isn't reinvesting funds back into the business and returns aren't growing. Since the stock has gained an impressive 40% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Vitesco Technologies Group 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. 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.