What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Vogiatzoglou Systems (ATH:VOSYS) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for Vogiatzoglou Systems, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = €2.0m ÷ (€28m – €8.9m) (Based on the trailing twelve months to December 2019).
Thus, Vogiatzoglou Systems has an ROCE of 10%. That’s a relatively normal return on capital, and it’s around the 11% generated by the Trade Distributors industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’d like to look at how Vogiatzoglou Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We like the trends that we’re seeing from Vogiatzoglou Systems. Over the last five years, returns on capital employed have risen substantially to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 43% more capital is being employed now too. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
Our Take On Vogiatzoglou Systems’ ROCE
In summary, it’s great to see that Vogiatzoglou Systems can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these trends are being accounted for by investors. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
If you want to continue researching Vogiatzoglou Systems, you might be interested to know about the 2 warning signs that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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