Vitesco Technologies Group (ETR:VTSC) Hasn't Managed To Accelerate Its Returns
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Vitesco Technologies Group (ETR:VTSC) 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 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. Analysts use this formula to calculate it for Vitesco Technologies Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = €104m ÷ (€7.6b - €3.5b) (Based on the trailing twelve months to June 2023).
Thus, Vitesco Technologies Group has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 11%.
View our latest analysis for Vitesco Technologies Group
In the above chart we have measured Vitesco Technologies Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Vitesco Technologies Group Tell Us?
We've noticed that although returns on capital are flat over the last four years, the amount of capital employed in the business has fallen 21% in that same period. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 2.5%, it's hard to get excited about these developments.
Another thing to note, Vitesco Technologies Group has a high ratio of current liabilities to total assets of 46%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Vitesco Technologies Group's ROCE
In summary, Vitesco Technologies Group isn't reinvesting funds back into the business and returns aren't growing. Since the stock has gained an impressive 48% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Vitesco Technologies Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Vitesco Technologies Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
