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. 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 Vesuvius (LON:VSVS), it didn't seem to tick all of these boxes.

What Is 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 Vesuvius:

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

0.10 = UK￡188m ÷ (UK￡2.3b - UK￡475m) (Based on the trailing twelve months to December 2023).

Therefore, Vesuvius has an ROCE of 10%. In isolation, that's a pretty standard return but against the Machinery industry average of 13%, it's not as good.

View our latest analysis for Vesuvius

In the above chart we have measured Vesuvius' 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 Vesuvius for free.

So How Is Vesuvius' ROCE Trending?

Over the past five years, Vesuvius' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Vesuvius to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Vesuvius has been paying out a decent 44% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

In Conclusion...

In summary, Vesuvius isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 23% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 2 warning signs for Vesuvius that we think you should be aware of.