If we want to find a stock that could multiply over the long term, what are the underlying trends we should be looking for? Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. So when we looked Vicar (NASDAQ:VICR) and its ROCE trend, we really liked what we saw.
What is return on capital employed (ROCE)?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for Vicor, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = $46 million ÷ ($489 million – $50 million) (Based on the last twelve months to March 2022).
Thereby, Vicor has a ROCE of 10%. This in itself is a normal return on capital and is in line with industry average returns of 9.6%.
See our latest analysis for Vicor
Above, you can see how Vicor’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you want to see what analysts predict for the future, you should check out our free report for Vicor.
What can we say about Vicor’s ROCE trend?
We are delighted to see that Vicor is reaping the rewards of its investments and is now generating pre-tax profits. About five years ago, the company was generating losses, but things have reversed as it now earns 10% on its capital. On top of that, Vicor employs 233% more capital than before, which is expected of a company trying to become profitable. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.
The Key Takeaway
Much to the delight of most shareholders, Vicor is now profitable. And since the stock has performed exceptionally well over the past five years, these trends are taken into account by investors. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.
Finally we found 1 warning sign for Vicor which we think you should be aware of.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.