Vestas Wind Systems (CPH:VWS) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 investigating Vestas Wind Systems (CPH:VWS), we don't think it's current trends fit the mold of a multi-bagger.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Vestas Wind Systems, this is the formula:

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

0.09 = €821m ÷ (€25b - €16b) (Based on the trailing twelve months to March 2025).

Therefore, Vestas Wind Systems has an ROCE of 9.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 12%.

See our latest analysis for Vestas Wind Systems

In the above chart we have measured Vestas Wind Systems' 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 analyst report for Vestas Wind Systems .

How Are Returns Trending?

In terms of Vestas Wind Systems' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 18% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Vestas Wind Systems has a current liabilities to total assets ratio of 64%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Vestas Wind Systems' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Vestas Wind Systems is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 25% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Vestas Wind Systems does have some risks though, and we've spotted 1 warning sign for Vestas Wind Systems that you might be interested in.

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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.