Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Vulcan Materials (NYSE:VMC) 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 Vulcan Materials is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.088 = US$914m ÷ (US$11b – US$1.0b) (Based on the trailing twelve months to June 2020).
So, Vulcan Materials has an ROCE of 8.8%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 9.3%.
In the above chart we have measured Vulcan Materials’ prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Vulcan Materials.
What Can We Tell From Vulcan Materials’ ROCE Trend?
While in absolute terms it isn’t a high ROCE, it’s promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
The Bottom Line On Vulcan Materials’ ROCE
To sum it up, Vulcan Materials has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 36% to shareholders. So with that in mind, we think the stock deserves further research.
If you want to continue researching Vulcan Materials, you might be interested to know about the 1 warning sign that our analysis has discovered.
While Vulcan Materials 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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