Vestum's (STO:VESTUM) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Vestum (STO:VESTUM) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Vestum, this is the formula:

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

0.0041 = kr9.5m ÷ (kr3.0b - kr690m) (Based on the trailing twelve months to September 2021).

So, Vestum has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 13%.

View our latest analysis for Vestum

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vestum's ROCE against it's prior returns. If you're interested in investigating Vestum's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Vestum's ROCE Trend?

Vestum has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 0.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Vestum is utilizing 12,385% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

Long story short, we're delighted to see that Vestum's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 57% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Vestum does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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.