Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don’t think Vulcan Materials (NYSE:VMC) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
What is Return On Capital Employed (ROCE)?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Vulcan Materials is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.086 = US$923m ÷ (US$11b – US$566m) (Based on the trailing twelve months to March 2021).
So, Vulcan Materials has an ROCE of 8.6%. Ultimately, that’s a low return and it under-performs the Basic Materials industry average of 11%.
View our latest analysis for Vulcan Materials
In the above chart we have measured Vulcan Materials’ 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 Vulcan Materials here for free.
What Can We Tell From Vulcan Materials’ ROCE Trend?
There are better returns on capital out there than what we’re seeing at Vulcan Materials. The company has employed 36% more capital in the last five years, and the returns on that capital have remained stable at 8.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don’t provide a high return on capital.
The Key Takeaway
In conclusion, Vulcan Materials has been investing more capital into the business, but returns on that capital haven’t increased. Although the market must be expecting these trends to improve because the stock has gained 72% over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
One more thing to note, we’ve identified 1 warning sign with Vulcan Materials and understanding it should be part of your investment process.
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.
This article by Simply Wall St is general in nature. 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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