Vincenzo Zucchi (BIT:ZUC) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Vincenzo Zucchi (BIT:ZUC) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Vincenzo Zucchi:

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

0.11 = €6.8m ÷ (€122m - €58m) (Based on the trailing twelve months to September 2020).

So, Vincenzo Zucchi has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Luxury industry.

Check out our latest analysis for Vincenzo Zucchi

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vincenzo Zucchi's ROCE against it's prior returns. If you're interested in investigating Vincenzo Zucchi's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Vincenzo Zucchi Tell Us?

When we looked at the ROCE trend at Vincenzo Zucchi, we didn't gain much confidence. Over the last one year, returns on capital have decreased to 11% from 36% one year ago. However it looks like Vincenzo Zucchi might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Vincenzo Zucchi has done well to pay down its current liabilities to 47% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 47% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Vincenzo Zucchi's ROCE

In summary, Vincenzo Zucchi is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Vincenzo Zucchi (of which 1 is a bit concerning!) that you should know about.

While Vincenzo Zucchi 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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