If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Voestalpine (VIE:VOE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Voestalpine, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.066 = €668m ÷ (€15b - €5.1b) (Based on the trailing twelve months to June 2021).
Thus, Voestalpine has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.
Check out our latest analysis for Voestalpine
In the above chart we have measured Voestalpine's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Voestalpine here for free.
What The Trend Of ROCE Can Tell Us
There hasn't been much to report for Voestalpine's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Voestalpine to be a multi-bagger going forward.
Our Take On Voestalpine's ROCE
In a nutshell, Voestalpine has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One final note, you should learn about the 5 warning signs we've spotted with Voestalpine (including 1 which makes us a bit uncomfortable) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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About WBAG:VOE
Voestalpine
Processes, develops, manufactures, and sells steel products in Austria, the European Union, and internationally.
Flawless balance sheet with reasonable growth potential.
