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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at VEEM (ASX:VEE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for VEEM, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.031 = AU$2.1m ÷ (AU$81m - AU$13m) (Based on the trailing twelve months to June 2022).

So, VEEM has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.

Check out our latest analysis for VEEM

Above you can see how the current ROCE for VEEM compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for VEEM.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 19% five years ago, while capital employed has grown 108%. That being said, VEEM raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. VEEM probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

In summary, VEEM is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

VEEM does have some risks though, and we've spotted 3 warning signs for VEEM that you might be interested in.

While VEEM isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.