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

What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Vincenzo Zucchi (BIT:ZUC) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Vincenzo Zucchi is:

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

0.13 = €14m ÷ (€153m - €50m) (Based on the trailing twelve months to September 2023).

Therefore, Vincenzo Zucchi has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Luxury industry.

Check out our latest analysis for Vincenzo Zucchi

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'd like to look at how Vincenzo Zucchi has performed in the past in other metrics, you can view this free graph of Vincenzo Zucchi's past earnings, revenue and cash flow.

What Does the ROCE Trend For Vincenzo Zucchi Tell Us?

In terms of Vincenzo Zucchi's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 36% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Vincenzo Zucchi has decreased its current liabilities to 33% of total assets. Since the ratio used to be 88%, that's a significant reduction and it no doubt explains the drop in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

While returns have fallen for Vincenzo Zucchi in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 24% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Vincenzo Zucchi does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is concerning...

While Vincenzo Zucchi 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.