Vale (BVMF:VALE3) Knows How To Allocate Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Vale's (BVMF:VALE3) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Vale:

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

0.33 = R$124b ÷ (R$442b - R$63b) (Based on the trailing twelve months to June 2022).

Thus, Vale has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 21% earned by companies in a similar industry.

Check out our latest analysis for Vale

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Investors would be pleased with what's happening at Vale. Over the last five years, returns on capital employed have risen substantially to 33%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. So we're very much inspired by what we're seeing at Vale thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that Vale is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 177% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Vale does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

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.

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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.