There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Verisk Analytics (NASDAQ:VRSK) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Verisk Analytics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$977m ÷ (US$7.2b - US$1.4b) (Based on the trailing twelve months to September 2020).
Therefore, Verisk Analytics has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Professional Services industry.
In the above chart we have measured Verisk Analytics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Verisk Analytics.
So How Is Verisk Analytics' ROCE Trending?
While the returns on capital are good, they haven't moved much. The company has employed 42% more capital in the last five years, and the returns on that capital have remained stable at 17%. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Our Take On Verisk Analytics' ROCE
To sum it up, Verisk Analytics has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 178% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On a final note, we've found 1 warning sign for Verisk Analytics that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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