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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Victrex (LON:VCT) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Victrex is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = UK£88m ÷ (UK£588m - UK£58m) (Based on the trailing twelve months to March 2022).
Therefore, Victrex has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Chemicals industry.
Above you can see how the current ROCE for Victrex compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Victrex here for free.
So How Is Victrex's ROCE Trending?
On the surface, the trend of ROCE at Victrex doesn't inspire confidence. Over the last five years, returns on capital have decreased to 17% from 24% 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. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Victrex's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Victrex is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 13% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a final note, we've found 1 warning sign for Victrex that we think you should be aware of.
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.
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