In This Article:
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Vesuvius (LON:VSVS) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Vesuvius is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = UK£181m ÷ (UK£2.3b - UK£620m) (Based on the trailing twelve months to June 2024).
Therefore, Vesuvius has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Machinery industry average it falls behind.
View our latest analysis for Vesuvius
Above you can see how the current ROCE for Vesuvius compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Vesuvius .
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at Vesuvius, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Vesuvius in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why Vesuvius is paying out 48% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
The Key Takeaway
In summary, Vesuvius isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Vesuvius does have some risks though, and we've spotted 2 warning signs for Vesuvius that you might be interested in.