Returns Are Gaining Momentum At Vimeo (NASDAQ:VMEO)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Vimeo (NASDAQ:VMEO) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Vimeo:

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

0.016 = US$6.1m ÷ (US$610m - US$228m) (Based on the trailing twelve months to September 2023).

Therefore, Vimeo has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 9.7%.

Check out our latest analysis for Vimeo

In the above chart we have measured Vimeo's 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 Vimeo.

The Trend Of ROCE

We're delighted to see that Vimeo is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses three years ago, but now it's earning 1.6% which is a sight for sore eyes. Not only that, but the company is utilizing 768% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Vimeo has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Vimeo's ROCE

Long story short, we're delighted to see that Vimeo's reinvestment activities have paid off and the company is now profitable. And with a respectable 16% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Vimeo does come with some risks, and we've found 1 warning sign that you should be aware of.

While Vimeo 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.