Capital Allocation Trends At Viro Tvornica Secera d.d (ZGSE:VIRO) Aren't Ideal

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Viro Tvornica Secera d.d (ZGSE:VIRO), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Viro Tvornica Secera d.d, this is the formula:

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

0.033 = Kn9.3m ÷ (Kn487m - Kn207m) (Based on the trailing twelve months to June 2022).

So, Viro Tvornica Secera d.d has an ROCE of 3.3%. In absolute terms, that's a low return but it's around the Food industry average of 4.0%.

Our analysis indicates that VIRO is potentially overvalued!

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Viro Tvornica Secera d.d's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Viro Tvornica Secera d.d's ROCE Trending?

The trend of returns that Viro Tvornica Secera d.d is generating are raising some concerns. The company used to generate 12% on its capital five years ago but it has since fallen noticeably. In addition to that, Viro Tvornica Secera d.d is now employing 59% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Viro Tvornica Secera d.d's current liabilities are still rather high at 42% of total assets. 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.

Our Take On Viro Tvornica Secera d.d's ROCE

To see Viro Tvornica Secera d.d reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 80% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 3 warning signs facing Viro Tvornica Secera d.d that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.