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. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at Verra Mobility (NASDAQ:VRRM) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Verra Mobility, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = US$194m ÷ (US$1.9b – US$181m) (Based on the trailing twelve months to June 2023).
Thus, Verra Mobility has an ROCE of 11%. That’s a relatively normal return on capital, and it’s around the 13% generated by the Professional Services industry.
View our latest analysis for Verra Mobility
In the above chart we have measured Verra Mobility’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Verra Mobility.
So How Is Verra Mobility’s ROCE Trending?
Investors would be pleased with what’s happening at Verra Mobility. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 36%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
What We Can Learn From Verra Mobility’s ROCE
To sum it up, Verra Mobility has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 72% return over the last three years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Verra Mobility does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable…
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.
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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.