Returns On Capital At VEEM (ASX:VEE) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Having said that, from a first glance at VEEM (ASX:VEE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 VEEM, this is the formula:

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

0.046 = AU$2.6m ÷ (AU$66m - AU$9.6m) (Based on the trailing twelve months to June 2020).

Therefore, VEEM has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

See our latest analysis for VEEM

In the above chart we have measured VEEM'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 VEEM here for free.

What Does the ROCE Trend For VEEM Tell Us?

When we looked at the ROCE trend at VEEM, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.6% from 18% five years ago. However it looks like VEEM might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On VEEM's ROCE

Bringing it all together, while we're somewhat encouraged by VEEM's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 35% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 3 warning signs for VEEM you'll probably want to know about.

While VEEM 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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