Vista Alegre Atlantis SGPS (ELI:VAF) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Vista Alegre Atlantis SGPS (ELI:VAF), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Vista Alegre Atlantis SGPS is:

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

0.03 = €5.1m ÷ (€233m - €61m) (Based on the trailing twelve months to June 2022).

So, Vista Alegre Atlantis SGPS has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 12%.

View our latest analysis for Vista Alegre Atlantis SGPS

Above you can see how the current ROCE for Vista Alegre Atlantis SGPS 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 Vista Alegre Atlantis SGPS here for free.

What Does the ROCE Trend For Vista Alegre Atlantis SGPS Tell Us?

In terms of Vista Alegre Atlantis SGPS' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.6% 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.

The Bottom Line On Vista Alegre Atlantis SGPS' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Vista Alegre Atlantis SGPS. However, despite the promising trends, the stock has fallen 34% over the last five years, 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.

If you'd like to know more about Vista Alegre Atlantis SGPS, we've spotted 3 warning signs, and 1 of them is a bit concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.