If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Verisk Analytics' (NASDAQ:VRSK) ROCE trend, we were pretty happy with 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 Verisk Analytics, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$903m ÷ (US$7.0b - US$1.5b) (Based on the trailing twelve months to June 2020).
So, Verisk Analytics has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 10% it's much better.
In the above chart we have measured Verisk Analytics' 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 Verisk Analytics.
How Are Returns Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 36% in that time. 16% is a pretty standard return, and it provides some comfort knowing that Verisk Analytics has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Verisk Analytics' ROCE
The main thing to remember is that Verisk Analytics has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 131% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Like most companies, Verisk Analytics does come with some risks, and we've found 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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