If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of Vercom (WSE:VRC) looks decent, right now, so lets see what the trend of returns can tell us.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Vercom, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = zł62m ÷ (zł581m - zł78m) (Based on the trailing twelve months to September 2023).
So, Vercom has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Software industry average of 13%.
See our latest analysis for Vercom
In the above chart we have measured Vercom'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 Vercom here for free.
The Trend Of ROCE
While the returns on capital are good, they haven't moved much. Over the past two years, ROCE has remained relatively flat at around 12% and the business has deployed 108% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Vercom has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
In the end, Vercom has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 95% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you're still interested in Vercom it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While Vercom isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
About WSE:VRC
Outstanding track record with excellent balance sheet.
