Vallourec's (EPA:VK) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Vallourec's (EPA:VK) returns on capital, so let's have a look.

Understanding 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)

0.069 = €253m ÷ (€5.3b - €1.6b) (Based on the trailing twelve months to June 2022).

Therefore, Vallourec has an ROCE of 6.9%. In absolute terms, that's a low return, but it's much better than the Energy Services industry average of 5.0%.

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, you can check out the forecasts from the analysts covering Vallourec here for free.

How Are Returns Trending?

We're delighted to see that Vallourec is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 6.9% which is no doubt a relief for some early shareholders. In regards to capital employed, Vallourec is using 24% 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.

Our Take On Vallourec's ROCE

From what we've seen above, Vallourec has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 86% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to continue researching Vallourec, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Vallourec may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.