Value Group (JSE:VLE) Is Experiencing Growth In Returns On Capital

By
Simply Wall St
Published
May 27, 2021
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Value Group (JSE:VLE) so let's look a bit deeper.

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 Value Group, this is the formula:

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

0.15 = R250m ÷ (R2.4b - R686m) (Based on the trailing twelve months to August 2020).

Thus, Value Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Transportation industry.

Check out our latest analysis for Value Group

roce
JSE:VLE Return on Capital Employed May 28th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Value Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Value Group. The data shows that returns on capital have increased substantially over the last five years to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 61% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Value Group's ROCE

In summary, it's great to see that Value Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Value Group can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 4 warning signs facing Value Group that you might find interesting.

While Value Group 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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