Here's What To Make Of SDI's (ASX:SDI) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, the ROCE of SDI (ASX:SDI) looks decent, right now, so lets see what the trend of returns can tell us.

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. To calculate this metric for SDI, this is the formula:

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

0.14 = AU$11m ÷ (AU$90m - AU$12m) (Based on the trailing twelve months to December 2019).

So, SDI has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Medical Equipment industry.

Check out our latest analysis for SDI

Historical performance is a great place to start when researching a stock so above you can see the gauge for SDI's ROCE against it's prior returns. If you'd like to look at how SDI has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is SDI's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 23% in that time. 14% is a pretty standard return, and it provides some comfort knowing that SDI has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

The main thing to remember is that SDI has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 66% to shareholders 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.

On a final note, we've found 2 warning signs for SDI that we think you should be aware of.

While SDI isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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