There Are Reasons To Feel Uneasy About VIGO System's (WSE:VGO) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at VIGO System (WSE:VGO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for VIGO System:

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

0.11 = zł21m ÷ (zł223m - zł29m) (Based on the trailing twelve months to March 2022).

Therefore, VIGO System has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Electronic industry average it falls behind.

View our latest analysis for VIGO System

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

So How Is VIGO System's ROCE Trending?

On the surface, the trend of ROCE at VIGO System doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for VIGO System. Furthermore the stock has climbed 76% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you're still interested in VIGO System it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While VIGO System 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.