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To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Vail Resorts (NYSE:MTN) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Vail Resorts:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$566m ÷ (US$5.5b - US$1.8b) (Based on the trailing twelve months to January 2025).
Therefore, Vail Resorts has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 9.8% it's much better.
See our latest analysis for Vail Resorts
In the above chart we have measured Vail Resorts' 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 analyst report for Vail Resorts .
So How Is Vail Resorts' ROCE Trending?
Vail Resorts' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 30% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 32% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
In Conclusion...
In summary, we're delighted to see that Vail Resorts has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 31% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.