Returns On Capital Are A Standout For Vallourec (EPA:VK)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 looked at the ROCE trend of Vallourec (EPA:VK) we really 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. The formula for this calculation on Vallourec is:

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

0.20 = €764m ÷ (€5.8b - €2.0b) (Based on the trailing twelve months to March 2023).

Therefore, Vallourec has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 6.7%.

View 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.

SWOT Analysis for Vallourec

What The Trend Of ROCE Can Tell Us

It's great to see that Vallourec has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 20% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 22%. Vallourec could be selling under-performing assets since the ROCE is improving.

In Conclusion...

From what we've seen above, Vallourec has managed to increase it's returns on capital all the while reducing it's capital base. However the stock is down a substantial 87% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

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

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.