Under The Bonnet, Verallia Deutschland's (FRA:OLG) Returns Look Impressive

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Verallia Deutschland's (FRA:OLG) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Verallia Deutschland is:

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

0.26 = €73m ÷ (€417m - €140m) (Based on the trailing twelve months to June 2021).

Therefore, Verallia Deutschland has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Packaging industry average of 9.8%.

View our latest analysis for Verallia Deutschland

Historical performance is a great place to start when researching a stock so above you can see the gauge for Verallia Deutschland's ROCE against it's prior returns. If you're interested in investigating Verallia Deutschland's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Verallia Deutschland Tell Us?

Verallia Deutschland has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 123% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Verallia Deutschland has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 37% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing, we've spotted 2 warning signs facing Verallia Deutschland that you might find interesting.

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. 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.