What are the early trends to look for to identify a stock that could multiply in value over the long term? Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. However, after briefly looking at the numbers, we don’t think Vector (NZSE: CDV) has the makings of a multi-bagger in the future, but let’s see why it might be.
Understanding return on capital employed (ROCE)
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for Vector:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.061 = 371 million NZ$ ÷ (6.8 billion NZ$ – 700 million NZ$) (Based on the last twelve months to June 2022).
Therefore, Vector posts a ROCE of 6.1%. On its own, that’s a poor return, but compared to the 4.9% average generated by the integrated utilities industry, it’s much better.
Above, you can see how Vector’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you wish, you can view analyst forecasts covering here for free.
So what is Vector’s ROCE trend?
As for Vector’s historic ROCE trend, it doesn’t really demand attention. Over the past five years, ROCE has remained relatively stable at around 6.1% and the company has deployed 24% more capital into its operations. Since the company has increased the amount of capital employed, it appears that the investments that have been made simply do not provide a high return on capital.
As we saw above, Vector’s return on capital has not increased, but it is reinvesting in the business. Considering the stock has gained an impressive 57% over the past five years, investors must be thinking there are better things to come. Ultimately, if the underlying trends persist, we won’t hold our breath that this is a multi-bagger going forward.
On a separate note, we found 2 vector warning signs you will probably want to know more.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high 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.
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