If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Vector (NZSE:VCT), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Vector:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = NZ$366m ÷ (NZ$6.5b - NZ$551m) (Based on the trailing twelve months to June 2021).
So, Vector has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Integrated Utilities industry average of 5.3%.
In the above chart we have measured Vector's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
There hasn't been much to report for Vector's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Vector doesn't end up being a multi-bagger in a few years time. That probably explains why Vector has been paying out 103% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
The Key Takeaway
We can conclude that in regards to Vector's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 59% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Vector does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...
While Vector may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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