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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Vestum (STO:VESTUM), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Vestum is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = kr199m ÷ (kr10.0b - kr1.7b) (Based on the trailing twelve months to June 2022).
Therefore, Vestum has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 11%.
View our latest analysis for Vestum
In the above chart we have measured Vestum's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Vestum's ROCE Trend?
In terms of Vestum's historical ROCE trend, it doesn't exactly demand attention. The company has employed 531% more capital in the last one year, and the returns on that capital have remained stable at 2.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Vestum's ROCE
As we've seen above, Vestum's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 49% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Vestum has the makings of a multi-bagger.
On a final note, we found 4 warning signs for Vestum (1 is concerning) you should be aware of.
While Vestum 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.
About OM:VESTUM
Vestum
Engages in the infrastructure, water, and service businesses in Sweden and internationally.
Undervalued with reasonable growth potential.
