When we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Ideally, a company will exhibit two trends: first, a growing return on the capital employed (ROCE) and secondly an increasing Crowd of the capital employed. When you see this, it usually means that it is a company with a great business model and numerous profitable reinvestment opportunities. With that in mind: Volcanic materials (NYSE:VMC) looks quite promising in terms of return on capital development.
What is return on capital employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual profit before tax (its return) relative to the capital employed in the business. Analysts use this formula to calculate it for Vulcan Materials:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.10 = $1.4 billion ÷ ($14 billion – $797 million) (Based on the last twelve months to June 2024).
Therefore, Vulcan Materials has a ROCE of 10%. This is a relatively normal return on capital and is roughly equivalent to the 13% achieved in the basic materials industry.
Check out our latest analysis for Vulcan Materials
Above you can see how the current ROCE for Vulcan Materials compares to previous returns on capital, but there is only so much to infer from the past. If you want, you can look at the forecasts of the analysts who are covering Vulcan Materials for free.
What the ROCE trend can tell us
We are excited about the trends we are seeing at Vulcan Materials. The numbers show that return on capital has increased significantly to 10% over the last five years. The amount of capital employed has also increased by 37%. So what we are seeing at Vulcan Materials is very inspiring because the company is able to reinvest capital profitably.
The most important things to take away
All in all, it’s great to see Vulcan Materials reaping the rewards of past investments and building its capital base. And given a respectable 84% return to those who have held the stock over the past five years, one could argue that these developments are starting to get the attention they deserve. Nevertheless, we believe the company deserves further careful scrutiny given its promising fundamentals.
However, Vulcan Materials does involve some risks and we have determined 2 warning signs for Vulcan Materials that might interest you.
While Vulcan Materials may not be generating the highest returns right now, we have compiled a list of companies that are currently generating a return on equity of over 25%. Check it out free List here.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
