There are a few key trends to look for if we want to identify the next multi-bagger. 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. So on that note, Visteon (NASDAQ:VC) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Visteon is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.061 = US$107m ÷ (US$2.5b – US$729m) (Based on the trailing twelve months to March 2020).
So, Visteon has an ROCE of 6.1%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 11%.
Above you can see how the current ROCE for Visteon compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Visteon here for free.
The Trend Of ROCE
We’re pretty happy with how the ROCE has been trending at Visteon. The figures show that over the last five years, returns on capital have grown by 122%. That’s a very favorable trend because this means that the company is earning more per dollar of capital that’s being employed. Interestingly, the business may be becoming more efficient because it’s applying 49% less capital than it was five years ago. A business that’s shrinking its asset base like this isn’t usually typical of a soon to be multi-bagger company.
In a nutshell, we’re pleased to see that Visteon has been able to generate higher returns from less capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 24% to shareholders. Given that, we’d look further into this stock in case it has more traits that could make it multiply in the long term.
If you’d like to know about the risks facing Visteon, we’ve discovered 4 warning signs that you should be aware of.
While Visteon isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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