Vista Alegre Atlantis SGPS (ELI:VAF) may have capital allocation issues

If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. Although, when we looked Vista Alegre Atlantis SGPS (ELI:VAF), it didn’t seem to tick all those boxes.

Understanding return on capital employed (ROCE)

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used 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 last twelve months to June 2022).

So, Vista Alegre Atlantis SGPS has a ROCE of 3.0%. Ultimately, that’s a weak return and it’s below the consumer durables industry average of 12%.

Check out our latest review for Vista Alegre Atlantis SGPS

ENXTLS: VAF Return on Committed Capital August 24, 2022

Above, you can see how Vista Alegre Atlantis SGPS’ current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you wish, you can view analyst forecasts covering Vista Alegre Atlantis SGPS here for free.

What does the ROCE trend tell us for Vista Alegre Atlantis SGPS?

In terms of historical ROCE movements of Vista Alegre Atlantis SGPS, the trend is not fantastic. To be more specific, ROCE has fallen by 5.6% over the past five years. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.

Vista Alegre Atlantis SGPS ROCE Basics

Even though capital returns have fallen in the short term, we think it’s promising that both revenue and capital employed have increased for Vista Alegre Atlantis SGPS. However, despite the promising trends, the stock has fallen 34% in the past five years, so there could be an opportunity here for shrewd investors. So we think it would be worth taking a closer look at this stock as the trends look encouraging.

If you want to know more about Vista Alegre Atlantis SGPS, we spotted 3 warning signs, and 1 of them is a little disturbing.

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

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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