Veidekke (OB:VEI) Knows How To Allocate Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Veidekke's (OB:VEI) look very promising so lets take a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Veidekke:

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

0.35 = kr1.6b ÷ (kr18b - kr13b) (Based on the trailing twelve months to June 2024).

Therefore, Veidekke has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

See our latest analysis for Veidekke

In the above chart we have measured Veidekke'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 Veidekke .

What The Trend Of ROCE Can Tell Us

Veidekke has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 407% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Veidekke appears to been achieving more with less, since the business is using 48% less capital to run its operation. Veidekke may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 73% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Veidekke's ROCE

From what we've seen above, Veidekke has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a solid 87% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Veidekke can keep these trends up, it could have a bright future ahead.

Like most companies, Veidekke does come with some risks, and we've found 1 warning sign that you should be aware of.

Veidekke is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.