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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Verbio (ETR:VBK), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Verbio is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.01 = €11m ÷ (€1.4b - €246m) (Based on the trailing twelve months to September 2024).
Therefore, Verbio has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 10%.
See our latest analysis for Verbio
Above you can see how the current ROCE for Verbio compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Verbio for free.
What Can We Tell From Verbio's ROCE Trend?
When we looked at the ROCE trend at Verbio, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.0% from 21% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
What We Can Learn From Verbio's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Verbio have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 11% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you'd like to know more about Verbio, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.