Largo Physical Vanadium (CVE:VAND) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. 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. So on that note, Largo Physical Vanadium (CVE:VAND) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Largo Physical Vanadium, this is the formula:

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

0.098 = US$1.7m ÷ (US$18m - US$390k) (Based on the trailing twelve months to September 2024).

Thus, Largo Physical Vanadium has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 3.4%.

View our latest analysis for Largo Physical Vanadium

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Largo Physical Vanadium's past further, check out this free graph covering Largo Physical Vanadium's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Largo Physical Vanadium has recently broken into profitability so their prior investments seem to be paying off. About two years ago the company was generating losses but things have turned around because it's now earning 9.8% on its capital. In addition to that, Largo Physical Vanadium is employing 60% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Largo Physical Vanadium has decreased current liabilities to 2.2% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Largo Physical Vanadium's ROCE

To the delight of most shareholders, Largo Physical Vanadium has now broken into profitability. Given the stock has declined 45% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Largo Physical Vanadium does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Largo Physical Vanadium 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. 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.