There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating VSE (NASDAQ:VSEC), we don't think it's current trends fit the mold of a multi-bagger.
What is 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. The formula for this calculation on VSE is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = US$58m ÷ (US$771m - US$134m) (Based on the trailing twelve months to September 2020).
Thus, VSE has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 9.9%.
Above you can see how the current ROCE for VSE compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for VSE.
What Can We Tell From VSE's ROCE Trend?
Things have been pretty stable at VSE, 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 VSE in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
Our Take On VSE's ROCE
In a nutshell, VSE has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to know some of the risks facing VSE we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.
While VSE isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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What are the risks and opportunities for VSE?
Trading at 85.4% below our estimate of its fair value
Earnings are forecast to grow 17.24% per year
Earnings grew by 278.1% over the past year
Debt is not well covered by operating cash flow
Significant insider selling over the past 3 months
This article by Simply Wall St is general in nature. 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.
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