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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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 ran our eye over Ventia Services Group's (ASX:VNT) trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Ventia Services Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = AU$334m ÷ (AU$3.0b - AU$1.3b) (Based on the trailing twelve months to June 2024).
Thus, Ventia Services Group has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.
See our latest analysis for Ventia Services Group
Above you can see how the current ROCE for Ventia Services Group 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 analyst report for Ventia Services Group .
How Are Returns Trending?
We'd be pretty happy with returns on capital like Ventia Services Group. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 71% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Ventia Services Group can keep this up, we'd be very optimistic about its future.
On a side note, Ventia Services Group's current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Ventia Services Group's ROCE
In summary, we're delighted to see that Ventia Services Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 72% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.