Viro Tvornica Secera d.d (ZGSE:VIRO) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Viro Tvornica Secera d.d (ZGSE:VIRO) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.034 = Kn11m ÷ (Kn545m - Kn231m) (Based on the trailing twelve months to December 2020).

So, Viro Tvornica Secera d.d has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.1%.

See our latest analysis for Viro Tvornica Secera d.d

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 want to delve into the historical earnings, revenue and cash flow of Viro Tvornica Secera d.d, check out these free graphs here.

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

It's great to see that Viro Tvornica Secera d.d has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 58% 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, Viro Tvornica Secera d.d's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

From what we've seen above, Viro Tvornica Secera d.d has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 91% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

One final note, you should learn about the 4 warning signs we've spotted with Viro Tvornica Secera d.d (including 3 which are a bit concerning) .

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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