Vallourec (EPA:VK) Could Become A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Vallourec's (EPA:VK) returns on capital, so let's have a look.

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. To calculate this metric for Vallourec, this is the formula:

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

0.25 = €981m ÷ (€5.8b - €1.8b) (Based on the trailing twelve months to June 2023).

So, 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 8.1%.

See our latest analysis for Vallourec

Above you can see how the current ROCE for Vallourec 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.

What Can We Tell From Vallourec's ROCE Trend?

Like most people, we're pleased that Vallourec is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 25% on their capital employed. In regards to capital employed, Vallourec is using 20% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Vallourec could be selling under-performing assets since the ROCE is improving.

The Key Takeaway

In a nutshell, we're pleased to see that Vallourec has been able to generate higher returns from less capital. And since the stock has dived 81% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

On a final note, we've found 2 warning signs for Vallourec that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.