Returns On Capital At Vulcan Materials (NYSE:VMC) Have Hit The Brakes

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Vulcan Materials (NYSE:VMC) 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Vulcan Materials, this is the formula:

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

0.078 = US$1.0b ÷ (US$15b - US$1.4b) (Based on the trailing twelve months to September 2022).

So, Vulcan Materials has an ROCE of 7.8%. On its own, that's a low figure but it's around the 9.1% average generated by the Basic Materials industry.

See our latest analysis for Vulcan Materials

Above you can see how the current ROCE for Vulcan Materials 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 report on analyst forecasts for the company.

So How Is Vulcan Materials' ROCE Trending?

The returns on capital haven't changed much for Vulcan Materials in recent years. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 7.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Vulcan Materials' ROCE

Long story short, while Vulcan Materials has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 35% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Vulcan Materials does have some risks though, and we've spotted 3 warning signs for Vulcan Materials that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.