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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Friedrich Vorwerk Group (ETR:VH2) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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 Friedrich Vorwerk Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = €13m ÷ (€297m - €78m) (Based on the trailing twelve months to March 2023).
So, Friedrich Vorwerk Group has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 27%.
See our latest analysis for Friedrich Vorwerk Group
In the above chart we have measured Friedrich Vorwerk 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.
The Trend Of ROCE
When we looked at the ROCE trend at Friedrich Vorwerk Group, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 5.8% from 38% three years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Friedrich Vorwerk Group has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.
Our Take On Friedrich Vorwerk Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Friedrich Vorwerk Group is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 64% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.