Varta (ETR:VAR1) Is Achieving High Returns On Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Varta's (ETR:VAR1) look very promising so lets take 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 Varta, this is the formula:

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

0.24 = €184m ÷ (€1.1b - €332m) (Based on the trailing twelve months to March 2021).

Thus, Varta has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Electrical industry average of 12%.

View our latest analysis for Varta

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

What Does the ROCE Trend For Varta Tell Us?

Investors would be pleased with what's happening at Varta. Over the last four years, returns on capital employed have risen substantially to 24%. The amount of capital employed has increased too, by 577%. So we're very much inspired by what we're seeing at Varta thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that Varta is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 598% to shareholders over the last three years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing Varta we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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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