October 6, 2022

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Capital Allocation Trends At Valero Energy (NYSE:VLO) Aren’t Ideal

If we’re looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that’s often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Valero Energy (NYSE:VLO) we aren’t filled with optimism, but let’s investigate further.

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 Valero Energy:

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

0.0041 = US$166m ÷ (US$55b – US$14b) (Based on the trailing twelve months to September 2021).

Thus, Valero Energy has an ROCE of 0.4%. In absolute terms, that’s a low return and it also under-performs the Oil and Gas industry average of 9.2%.

Check out our latest analysis for Valero Energy

roce
NYSE:VLO Return on Capital Employed December 24th 2021

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.

What Can We Tell From Valero Energy’s ROCE Trend?

In terms of Valero Energy’s historical ROCE movements, the trend doesn’t inspire confidence. Unfortunately the returns on capital have diminished from the 9.6% that they were earning five years ago. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn’t expect Valero Energy to turn into a multi-bagger.

The Bottom Line On Valero Energy’s ROCE

In summary, it’s unfortunate that Valero Energy is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 32% return to shareholders who held over the last five years. Either way, we aren’t huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we found 2 warning signs for Valero Energy (1 is a bit concerning) you should be aware of.

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.

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.