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

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Verra Mobility (NASDAQ:VRRM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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)

0.072 = US$98m ÷ (US$1.5b - US$117m) (Based on the trailing twelve months to September 2021).

Thus, Verra Mobility has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the IT industry average of 13%.

Check out 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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Verra Mobility, we didn't gain much confidence. Around four years ago the returns on capital were 9.4%, but since then they've fallen to 7.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Verra Mobility. And the stock has followed suit returning a meaningful 58% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Verra Mobility does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While Verra Mobility 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.

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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