If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Vista Outdoor's (NYSE:VSTO) returns on capital, so let's have a look.
Understanding 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 Vista Outdoor is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$274m ÷ (US$1.8b - US$371m) (Based on the trailing twelve months to March 2021).
Therefore, Vista Outdoor has an ROCE of 20%. That's a relatively normal return on capital, and it's around the 19% generated by the Leisure industry.
In the above chart we have measured Vista Outdoor'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.
The Trend Of ROCE
You'd find it hard not to be impressed with the ROCE trend at Vista Outdoor. The data shows that returns on capital have increased by 92% over the trailing five years. The company is now earning US$0.2 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 46% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line On Vista Outdoor's ROCE
In the end, Vista Outdoor has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 29% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know more about Vista Outdoor, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.
While Vista Outdoor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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