Shareholders Would Enjoy A Repeat Of Vale's (BVMF:VALE3) Recent Growth In Returns

By
Simply Wall St
Published
January 07, 2022
BOVESPA:VALE3
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Vale (BVMF:VALE3) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Vale, this is the formula:

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

0.42 = R$162b ÷ (R$473b - R$87b) (Based on the trailing twelve months to September 2021).

Thus, Vale has an ROCE of 42%. That's a fantastic return and not only that, it outpaces the average of 31% earned by companies in a similar industry.

View our latest analysis for Vale

roce
BOVESPA:VALE3 Return on Capital Employed January 7th 2022

Above you can see how the current ROCE for Vale compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Vale here for free.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Vale are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 42%. Basically the business is earning more per dollar of capital invested and in addition to that, 30% 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.

Our Take On Vale's ROCE

To sum it up, Vale has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Vale (of which 1 is potentially serious!) that you should know about.

Vale is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.