Velan (TSE:VLN) Is Doing The Right Things To Multiply Its Share Price

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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, Velan (TSE:VLN) looks quite promising in regards to its trends of return on capital.

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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 Velan, this is the formula:

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

0.19 = US$40m ÷ (US$510m - US$302m) (Based on the trailing twelve months to November 2024).

So, Velan has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.8% it's much better.

See our latest analysis for Velan

Historical performance is a great place to start when researching a stock so above you can see the gauge for Velan's ROCE against it's prior returns. If you'd like to look at how Velan has performed in the past in other metrics, you can view this free graph of Velan's past earnings, revenue and cash flow.

So How Is Velan's ROCE Trending?

Velan has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 900%. The company is now earning US$0.2 per dollar of capital employed. In regards to capital employed, Velan appears to been achieving more with less, since the business is using 38% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 59% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

In a nutshell, we're pleased to see that Velan has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 3 warning signs with Velan (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While Velan may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.