If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Valmont Industries (NYSE:VMI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for Valmont Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$273m ÷ (US$3.0b - US$673m) (Based on the trailing twelve months to December 2020).
Therefore, Valmont Industries has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Construction industry.
Above you can see how the current ROCE for Valmont Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Valmont Industries here for free.
So How Is Valmont Industries' ROCE Trending?
Things have been pretty stable at Valmont Industries, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Valmont Industries in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
What We Can Learn From Valmont Industries' ROCE
In a nutshell, Valmont Industries has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 76% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you'd like to know about the risks facing Valmont Industries, we've discovered 3 warning signs that you should be aware of.
While Valmont Industries 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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