Why The 21% Return On Capital At Vallourec (EPA:VK) Should Have Your Attention

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. With that in mind, the ROCE of Vallourec (EPA:VK) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Vallourec:

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

0.21 = €743m ÷ (€5.3b - €1.7b) (Based on the trailing twelve months to June 2024).

So, Vallourec has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 10.0%.

See 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 analyst report for Vallourec .

What Can We Tell From Vallourec's ROCE Trend?

Shareholders will be relieved that Vallourec has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 21% on its capital. While returns have increased, the amount of capital employed by Vallourec has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

In summary, we're delighted to see that Vallourec has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 57% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

While Vallourec looks impressive, no company is worth an infinite price. The intrinsic value infographic for VK helps visualize whether it is currently trading for a fair price.

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.