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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Victoria (LON:VCP), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Victoria, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = UK£49m ÷ (UK£1.6b - UK£463m) (Based on the trailing twelve months to March 2024).
Therefore, Victoria has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.3%.
See our latest analysis for Victoria
Above you can see how the current ROCE for Victoria 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 Victoria .
The Trend Of ROCE
On the surface, the trend of ROCE at Victoria doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.2% from 5.6% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Victoria's current liabilities have increased over the last five years to 28% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.2%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
Our Take On Victoria's ROCE
We're a bit apprehensive about Victoria because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 75% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.