Capital Allocation Trends At Vantea SMART (BIT:VNT) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after investigating Vantea SMART (BIT:VNT), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Vantea SMART, this is the formula:

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

0.13 = €3.4m ÷ (€43m - €16m) (Based on the trailing twelve months to June 2022).

Therefore, Vantea SMART has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 7.9% it's much better.

View our latest analysis for Vantea SMART

In the above chart we have measured Vantea SMART's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Vantea SMART here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Vantea SMART doesn't inspire confidence. To be more specific, ROCE has fallen from 19% over the last two years. 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.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Vantea SMART. However, despite the promising trends, the stock has fallen 32% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Vantea SMART does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.

While Vantea SMART 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.