Veeva Systems' (NYSE:VEEV) Returns On Capital Not Reflecting Well On The Business
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Veeva Systems (NYSE:VEEV), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for Veeva Systems:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$403m ÷ (US$5.2b - US$768m) (Based on the trailing twelve months to October 2023).
Thus, Veeva Systems has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Healthcare Services industry average of 5.0%.
See our latest analysis for Veeva Systems
In the above chart we have measured Veeva Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Veeva Systems here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Veeva Systems, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.0% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Veeva Systems' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Veeva Systems. And long term investors must be optimistic going forward because the stock has returned a huge 125% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
Veeva Systems does have some risks though, and we've spotted 1 warning sign for Veeva Systems that you might be interested in.
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.
