What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Viscofan's (BME:VIS) trend of ROCE, we liked what we saw.
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 Viscofan, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = €180m ÷ (€1.2b - €168m) (Based on the trailing twelve months to September 2021).
So, Viscofan has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 4.8% generated by the Food industry.
View our latest analysis for Viscofan
Above you can see how the current ROCE for Viscofan 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.
The Trend Of ROCE
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 30% more capital into its operations. 18% is a pretty standard return, and it provides some comfort knowing that Viscofan has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On Viscofan's ROCE
In the end, Viscofan has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 31% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Viscofan is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
Viscofan does have some risks though, and we've spotted 1 warning sign for Viscofan that you might be interested in.
While Viscofan 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.
About BME:VIS
Excellent balance sheet with proven track record.
