We Like These Underlying Return On Capital Trends At Vmoto (ASX:VMT)

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. 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, Vmoto (ASX:VMT) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Vmoto is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.084 = AU$6.8m ÷ (AU$96m - AU$16m) (Based on the trailing twelve months to December 2023).

Therefore, Vmoto has an ROCE of 8.4%. On its own, that's a low figure but it's around the 9.0% average generated by the Auto industry.

Check out our latest analysis for Vmoto

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vmoto's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Vmoto.

What Does the ROCE Trend For Vmoto Tell Us?

The fact that Vmoto is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Vmoto is utilizing 426% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Vmoto has decreased current liabilities to 17% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Vmoto's ROCE

Overall, Vmoto gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business.

If you want to know some of the risks facing Vmoto we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.