Red Violet (NASDAQ:RDVT) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Red Violet's (NASDAQ:RDVT) returns on capital, so let's have a look.

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 Red Violet is:

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

0.048 = US$4.1m ÷ (US$94m - US$8.3m) (Based on the trailing twelve months to March 2024).

Therefore, Red Violet has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.7%.

View our latest analysis for Red Violet

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

What The Trend Of ROCE Can Tell Us

Red Violet has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Red Violet is utilizing 125% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Red Violet's ROCE

To the delight of most shareholders, Red Violet has now broken into profitability. Since the stock has returned a solid 64% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Red Violet can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Red Violet, we've discovered 1 warning sign that you should be aware of.

While Red Violet 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.

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