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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at VerticalScope Holdings (TSE:FORA) so let's look a bit deeper.
Understanding 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. Analysts use this formula to calculate it for VerticalScope Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = US$9.0m ÷ (US$137m - US$14m) (Based on the trailing twelve months to September 2024).
Thus, VerticalScope Holdings has an ROCE of 7.3%. Even though it's in line with the industry average of 7.3%, it's still a low return by itself.
See our latest analysis for VerticalScope Holdings
In the above chart we have measured VerticalScope Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for VerticalScope Holdings .
What Does the ROCE Trend For VerticalScope Holdings Tell Us?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 7.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 63% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In Conclusion...
To sum it up, VerticalScope Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 65% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing: We've identified 2 warning signs with VerticalScope Holdings (at least 1 which is potentially serious) , and understanding these would certainly be useful.