Returns On Capital At Van Elle Holdings (LON:VANL) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Van Elle Holdings (LON:VANL), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Van Elle Holdings is:

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

0.028 = UK£1.6m ÷ (UK£86m - UK£31m) (Based on the trailing twelve months to October 2021).

Therefore, Van Elle Holdings has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.2%.

View our latest analysis for Van Elle Holdings

Above you can see how the current ROCE for Van Elle Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Van Elle Holdings here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Van Elle Holdings doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 2.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Van Elle Holdings. And there could be an opportunity here if other metrics look good too, because the stock has declined 57% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing to note, we've identified 3 warning signs with Van Elle Holdings and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.