Vimeo (NASDAQ:VMEO) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Vimeo (NASDAQ:VMEO) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Vimeo, this is the formula:

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

0.063 = US$26m ÷ (US$626m - US$215m) (Based on the trailing twelve months to June 2024).

Thus, Vimeo has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Interactive Media and Services industry average of 6.6%.

View our latest analysis for Vimeo

Above you can see how the current ROCE for Vimeo 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 analyst report for Vimeo .

What The Trend Of ROCE Can Tell Us

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 four years ago, but now it's earning 6.3% which is a sight for sore eyes. Not only that, but the company is utilizing 703% 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 34% 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

To the delight of most shareholders, Vimeo has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 87% in the last three years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for VMEO that compares the share price and estimated value.

While Vimeo 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.

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