Yahoo Finance Will Vertu Motors (LON:VTU) Multiply In Value Going Forward?
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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Vertu Motors (LON:VTU) looks decent, right now, so lets see what the trend of returns can tell us.
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. To calculate this metric for Vertu Motors, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = UK£42m ÷ (UK£1.1b - UK£656m) (Based on the trailing twelve months to August 2020).
So, Vertu Motors has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Specialty Retail industry.
See our latest analysis for Vertu Motors
Above you can see how the current ROCE for Vertu Motors compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Vertu Motors.
The Trend Of ROCE
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 105% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, Vertu Motors' current liabilities are still rather high at 61% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Vertu Motors' ROCE
To sum it up, Vertu Motors has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last five years the stock has declined 36%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
On a separate note, we've found 1 warning sign for Vertu Motors you'll probably want to know about.
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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