Be Wary Of VIGO Photonics (WSE:VGO) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating VIGO Photonics (WSE:VGO), 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 who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on VIGO Photonics is:

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

0.052 = zł11m ÷ (zł253m - zł39m) (Based on the trailing twelve months to September 2022).

So, VIGO Photonics has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 18%.

See our latest analysis for VIGO Photonics

In the above chart we have measured VIGO Photonics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for VIGO Photonics.

SWOT Analysis for VIGO Photonics

What Does the ROCE Trend For VIGO Photonics Tell Us?

When we looked at the ROCE trend at VIGO Photonics, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 5.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 VIGO Photonics' ROCE

To conclude, we've found that VIGO Photonics is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 92% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

VIGO Photonics does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While VIGO Photonics 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.