Why You Should Care About Varta's (ETR:VAR1) Strong Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Varta's (ETR:VAR1) trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Varta:

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

0.22 = €180m ÷ (€1.3b - €467m) (Based on the trailing twelve months to September 2021).

Thus, Varta has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 6.2% earned by companies in a similar industry.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Varta's history of ROCE, it's quite impressive. The company has employed 543% more capital in the last four years, and the returns on that capital have remained stable at 22%. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Varta can keep this up, we'd be very optimistic about its future.

The Key Takeaway

Varta has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. On top of that, the stock has rewarded shareholders with a remarkable 313% return to those who've held over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to know some of the risks facing Varta we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

Varta is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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.

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