Videndum (LON:VID) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Videndum (LON:VID), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Videndum is:

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

0.092 = UK£33m ÷ (UK£481m - UK£121m) (Based on the trailing twelve months to June 2023).

Therefore, Videndum has an ROCE of 9.2%. On its own, that's a low figure but it's around the 11% average generated by the Consumer Durables industry.

Check out our latest analysis for Videndum

In the above chart we have measured Videndum'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 Videndum.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Videndum, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.2% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Videndum's reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 76% over the last five years. Therefore based on the analysis done in this article, we don't think Videndum has the makings of a multi-bagger.

If you want to know some of the risks facing Videndum we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Videndum 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.