What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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, Vicor (NASDAQ:VICR) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Vicor is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$52m ÷ (US$446m - US$50m) (Based on the trailing twelve months to June 2021).
Thus, Vicor has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Electrical industry.
Above you can see how the current ROCE for Vicor compares to its prior returns on capital, but there's only so much you can tell from the past. 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 Vicor's ROCE Trend?
The fact that Vicor is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 13% which is a sight for sore eyes. In addition to that, Vicor is employing 202% more capital than previously which is expected of a company that's trying to break into profitability. 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.
The Key Takeaway
Long story short, we're delighted to see that Vicor's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 917% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Vicor does come with some risks, and we've found 1 warning sign that you should be aware of.
While Vicor 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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