In This Article:
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Virco Mfg (NASDAQ:VIRC) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Virco Mfg, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$33m ÷ (US$210m - US$42m) (Based on the trailing twelve months to October 2024).
Therefore, Virco Mfg has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% generated by the Commercial Services industry.
View our latest analysis for Virco Mfg
In the above chart we have measured Virco Mfg's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Virco Mfg for free.
What Does the ROCE Trend For Virco Mfg Tell Us?
Investors would be pleased with what's happening at Virco Mfg. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 47%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Our Take On Virco Mfg's ROCE
All in all, it's terrific to see that Virco Mfg is reaping the rewards from prior investments and is growing its capital base. And a remarkable 127% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we've spotted 1 warning sign facing Virco Mfg that you might find interesting.
While Virco Mfg isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.