Under The Bonnet, Virco Mfg's (NASDAQ:VIRC) Returns Look Impressive

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Virco Mfg (NASDAQ:VIRC) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Virco Mfg, this is the formula:

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

0.22 = US$36m ÷ (US$216m - US$56m) (Based on the trailing twelve months to July 2024).

So, Virco Mfg has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 10%.

View our latest analysis for Virco Mfg

Above you can see how the current ROCE for Virco Mfg 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 analyst report for Virco Mfg .

So How Is Virco Mfg's ROCE Trending?

We like the trends that we're seeing from Virco Mfg. Over the last five years, returns on capital employed have risen substantially to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 41%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a related note, the company's ratio of current liabilities to total assets has decreased to 26%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Virco Mfg has. And a remarkable 282% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for VIRC that compares the share price and estimated value.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.