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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Vimeo (NASDAQ:VMEO) and its trend of ROCE, we really liked what we saw.
What Is 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 Vimeo:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$21m ÷ (US$643m - US$222m) (Based on the trailing twelve months to December 2024).
So, Vimeo has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 6.7%.
Check out our latest analysis for Vimeo
In the above chart we have measured Vimeo'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 analyst report for Vimeo .
What Does the ROCE Trend For Vimeo Tell Us?
Vimeo has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.0% on its capital. Not only that, but the company is utilizing 542% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
One more thing to note, Vimeo has decreased current liabilities to 35% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
Our Take On Vimeo's ROCE
To the delight of most shareholders, Vimeo has now broken into profitability. And since the stock has fallen 57% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.