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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Valero Energy's (NYSE:VLO) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Valero Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.33 = US$15b ÷ (US$61b - US$15b) (Based on the trailing twelve months to June 2023).
Therefore, Valero Energy has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 22%.
Check out our latest analysis for Valero Energy
Above you can see how the current ROCE for Valero Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Valero Energy has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 200% 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.
The Bottom Line
To bring it all together, Valero Energy has done well to increase the returns it's generating from its capital employed. And with a respectable 40% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Valero Energy can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 1 warning sign with Valero Energy and understanding this should be part of your investment process.