Vertoz Advertising (NSE:VERTOZ) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Vertoz Advertising (NSE:VERTOZ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Vertoz Advertising, this is the formula:

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

0.17 = ₹177m ÷ (₹1.3b - ₹266m) (Based on the trailing twelve months to June 2023).

Thus, Vertoz Advertising has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.1% generated by the Media industry.

View our latest analysis for Vertoz Advertising

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Vertoz Advertising doesn't inspire confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 17%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Vertoz Advertising is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 259% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing Vertoz Advertising, we've discovered 2 warning signs that you should be aware of.

While Vertoz Advertising may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.