Friedrich Vorwerk Group's (FRA:VH2) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Friedrich Vorwerk Group (FRA:VH2), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Friedrich Vorwerk Group is:

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

0.17 = €35m ÷ (€290m - €79m) (Based on the trailing twelve months to December 2021).

Thus, Friedrich Vorwerk Group has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 14% generated by the Oil and Gas industry.

View our latest analysis for Friedrich Vorwerk Group

In the above chart we have measured Friedrich Vorwerk 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 Friedrich Vorwerk Group here for free.

What Does the ROCE Trend For Friedrich Vorwerk Group Tell Us?

In terms of Friedrich Vorwerk Group's historical ROCE movements, the trend isn't fantastic. Over the last two years, returns on capital have decreased to 17% from 40% two years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Friedrich Vorwerk Group has done well to pay down its current liabilities to 27% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Friedrich Vorwerk Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 38% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Friedrich Vorwerk Group we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Friedrich Vorwerk Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.