What Do The Returns At Vertex Resource Group (CVE:VTX) Mean Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Vertex Resource Group (CVE:VTX) so let's look a bit deeper.

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. The formula for this calculation on Vertex Resource Group is:

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

0.041 = CA$4.8m ÷ (CA$150m - CA$33m) (Based on the trailing twelve months to September 2020).

Therefore, Vertex Resource Group has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 7.3%.

Check out our latest analysis for Vertex Resource Group

In the above chart we have measured Vertex Resource Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Vertex Resource Group's ROCE Trend?

The fact that Vertex Resource Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 4.1% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Vertex Resource Group is utilizing 93% more capital than it was four 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

To the delight of most shareholders, Vertex Resource Group has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 36% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Vertex Resource Group we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Vertex Resource Group 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. 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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