Be Wary Of Zignago Vetro (BIT:ZV) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Zignago Vetro (BIT:ZV) 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?

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 Zignago Vetro:

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

0.073 = €37m ÷ (€723m - €214m) (Based on the trailing twelve months to September 2022).

Thus, Zignago Vetro has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Packaging industry average of 10%.

Our analysis indicates that ZV is potentially undervalued!

Above you can see how the current ROCE for Zignago Vetro compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zignago Vetro here for free.

What Does the ROCE Trend For Zignago Vetro Tell Us?

In terms of Zignago Vetro's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.3%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Zignago Vetro's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Zignago Vetro is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 111% 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 Zignago Vetro, we've discovered 2 warning signs that you should be aware of.

While Zignago Vetro 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.