Investors Shouldn't Overlook Vallourec's (EPA:VK) Impressive Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. And in light of that, the trends we're seeing at Vallourec's (EPA:VK) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Vallourec is:

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

0.25 = €1.0b ÷ (€5.9b - €1.9b) (Based on the trailing twelve months to September 2023).

Thus, Vallourec has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 10%.

Check out our latest analysis for Vallourec

In the above chart we have measured Vallourec's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Vallourec.

The Trend Of ROCE

Shareholders will be relieved that Vallourec has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 25%, which is always encouraging. While returns have increased, the amount of capital employed by Vallourec has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

Our Take On Vallourec's ROCE

To sum it up, Vallourec is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 48% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found 1 warning sign for Vallourec that we think you should be aware of.

Vallourec 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.