Investors Will Want Viro Tvornica Secera d.d's (ZGSE:VIRO) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at Viro Tvornica Secera d.d (ZGSE:VIRO) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Viro Tvornica Secera d.d:

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

0.042 = Kn12m ÷ (Kn508m - Kn219m) (Based on the trailing twelve months to March 2021).

Thus, Viro Tvornica Secera d.d has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Food industry average of 7.3%.

View our latest analysis for Viro Tvornica Secera d.d

Historical performance is a great place to start when researching a stock so above you can see the gauge for Viro Tvornica Secera d.d's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Viro Tvornica Secera d.d, check out these free graphs here.

How Are Returns Trending?

Like most people, we're pleased that Viro Tvornica Secera d.d is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 4.2% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 60% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 43% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

In summary, it's great to see that Viro Tvornica Secera d.d has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 93% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

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

While Viro Tvornica Secera d.d 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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