Returns On Capital At Vulcan Materials (NYSE:VMC) Have Stalled

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Vulcan Materials (NYSE:VMC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Vulcan Materials is:

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

0.093 = US$1.3b ÷ (US$15b - US$864m) (Based on the trailing twelve months to September 2023).

Thus, Vulcan Materials has an ROCE of 9.3%. On its own, that's a low figure but it's around the 11% average generated by the Basic Materials industry.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free report for Vulcan Materials.

What Can We Tell From Vulcan Materials' ROCE Trend?

There are better returns on capital out there than what we're seeing at Vulcan Materials. Over the past five years, ROCE has remained relatively flat at around 9.3% and the business has deployed 50% more capital into its operations. 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

In conclusion, Vulcan Materials has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 141% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Vulcan Materials, we've discovered 2 warning signs that you should be aware of.

While Vulcan Materials 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. 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.