Vail Resorts (NYSE:MTN) Might Be Having Difficulty Using Its Capital Effectively

By
Simply Wall St
Published
July 24, 2021
NYSE:MTN
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Vail Resorts (NYSE:MTN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Vail Resorts is:

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

0.05 = US$277m ÷ (US$6.3b - US$717m) (Based on the trailing twelve months to April 2021).

Thus, Vail Resorts has an ROCE of 5.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.0%.

View our latest analysis for Vail Resorts

roce
NYSE:MTN Return on Capital Employed July 24th 2021

In the above chart we have measured Vail Resorts' 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 Vail Resorts.

What Can We Tell From Vail Resorts' ROCE Trend?

In terms of Vail Resorts' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 5.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Vail Resorts' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Vail Resorts have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 141% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Vail Resorts, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Vail Resorts 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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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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