CVC Technologies (GTSM:4744) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at CVC Technologies (GTSM:4744) and its ROCE trend, we weren't exactly thrilled.

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 CVC Technologies is:

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

0.072 = NT$102m ÷ (NT$1.9b - NT$446m) (Based on the trailing twelve months to December 2020).

Thus, CVC Technologies has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 10%.

See our latest analysis for CVC Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for CVC Technologies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of CVC Technologies, check out these free graphs here.

So How Is CVC Technologies' ROCE Trending?

In terms of CVC Technologies' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 12% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, CVC Technologies has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From CVC Technologies' ROCE

Bringing it all together, while we're somewhat encouraged by CVC Technologies' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 13% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 4 warning signs we've spotted with CVC Technologies (including 2 which are 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. 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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