Vitzro Tech (KOSDAQ:042370) May Have Issues Allocating Its 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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Vitzro Tech (KOSDAQ:042370) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Vitzro Tech is:

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

0.068 = ₩29b ÷ (₩545b - ₩118b) (Based on the trailing twelve months to June 2024).

Therefore, Vitzro Tech has an ROCE of 6.8%. On its own, that's a low figure but it's around the 8.3% average generated by the Electrical industry.

Check out our latest analysis for Vitzro Tech

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

So How Is Vitzro Tech's ROCE Trending?

In terms of Vitzro Tech's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.8% from 13% five years ago. However it looks like Vitzro Tech 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.

What We Can Learn From Vitzro Tech's ROCE

Bringing it all together, while we're somewhat encouraged by Vitzro Tech's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 46% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 1 warning sign with Vitzro Tech and understanding it should be part of your investment process.

While Vitzro Tech 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.