Red Violet (NASDAQ:RDVT) Is Looking To Continue Growing Its Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Speaking of which, we noticed some great changes in Red Violet's (NASDAQ:RDVT) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Red Violet, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = US$2.5m ÷ (US$93m - US$4.9m) (Based on the trailing twelve months to December 2023).
Thus, Red Violet has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Software industry average of 7.4%.
Check out our latest analysis for Red Violet
Historical performance is a great place to start when researching a stock so above you can see the gauge for Red Violet's ROCE against it's prior returns. If you're interested in investigating Red Violet's past further, check out this free graph covering Red Violet's past earnings, revenue and cash flow.
So How Is Red Violet's ROCE Trending?
The fact that Red Violet is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Red Violet is utilizing 143% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
Overall, Red Violet gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 165% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for RDVT on our platform that is definitely worth checking out.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
