Verra Mobility (NASDAQ:VRRM) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Verra Mobility (NASDAQ:VRRM), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Verra Mobility is:

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

0.042 = US$62m ÷ (US$1.6b - US$107m) (Based on the trailing twelve months to June 2021).

Therefore, Verra Mobility has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

See our latest analysis for Verra Mobility

Above you can see how the current ROCE for Verra Mobility 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 Verra Mobility.

How Are Returns Trending?

In terms of Verra Mobility's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 4.2% from 12% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Verra Mobility's ROCE

Bringing it all together, while we're somewhat encouraged by Verra Mobility's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 44% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Verra Mobility, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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