Is VBG Group (STO:VBG B) Likely To Turn Things Around?

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think VBG Group (STO:VBG B) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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 VBG Group, this is the formula:

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

0.086 = kr338m ÷ (kr4.4b - kr415m) (Based on the trailing twelve months to September 2020).

Thus, VBG Group has an ROCE of 8.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 14%.

Check out our latest analysis for VBG Group

In the above chart we have measured VBG Group's 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 VBG Group.

What Can We Tell From VBG Group's ROCE Trend?

On the surface, the trend of ROCE at VBG Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.6% from 13% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From VBG Group's ROCE

In summary, we're somewhat concerned by VBG Group's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 106%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

While VBG Group doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While VBG Group 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. 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.
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