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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Victoria (LON:VCP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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)
0.047 = UK£71m ÷ (UK£2.0b - UK£501m) (Based on the trailing twelve months to October 2022).
Therefore, Victoria has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 13%.
Check out 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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago, while the business's capital employed increased by 497%. Usually this isn't ideal, but given Victoria conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Victoria might not have received a full period of earnings contribution from it.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Victoria is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 29% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One more thing: We've identified 3 warning signs with Victoria (at least 1 which is concerning) , and understanding them would certainly be useful.