Returns On Capital At VEEM (ASX:VEE) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating VEEM (ASX:VEE), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for VEEM:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.079 = AU$5.9m ÷ (AU$92m - AU$17m) (Based on the trailing twelve months to June 2023).

So, VEEM has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.7%.

Check out our latest analysis for VEEM

Above you can see how the current ROCE for VEEM 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 VEEM here for free.

The Trend Of ROCE

In terms of VEEM's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.9% for the last five years, and the capital employed within the business has risen 94% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From VEEM's ROCE

Long story short, while VEEM has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 92% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

VEEM does have some risks though, and we've spotted 1 warning sign for VEEM that you might be interested in.

While VEEM isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.