Did you know there are some financial metrics that can provide clues of a potential 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Vulcan Materials (NYSE:VMC), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Vulcan Materials:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.08 = US$1.1b ÷ (US$14b - US$757m) (Based on the trailing twelve months to March 2023).
So, Vulcan Materials has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 12%.
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, you can check out the forecasts from the analysts covering Vulcan Materials here for free.
SWOT Analysis for Vulcan Materials
- Earnings growth over the past year exceeded its 5-year average.
- Debt is well covered by earnings and cashflows.
- Earnings growth over the past year underperformed the Basic Materials industry.
- Dividend is low compared to the top 25% of dividend payers in the Basic Materials market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the American market.
- Annual revenue is forecast to grow slower than the American market.
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. The company has consistently earned 8.0% for the last five years, and the capital employed within the business has risen 50% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In conclusion, Vulcan Materials has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 62% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Vulcan Materials does have some risks though, and we've spotted 1 warning sign for Vulcan Materials that you might be interested in.
While Vulcan Materials may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
About NYSE:VMC
Vulcan Materials
Produces and supplies construction aggregates primarily in the United States.
Excellent balance sheet with acceptable track record.
