If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Standex International (NYSE:SXI) and its ROCE trend, we weren’t exactly thrilled.
What is Return On Capital Employed (ROCE)?
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 Standex International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.083 = US$67m ÷ (US$931m – US$123m) (Based on the trailing twelve months to June 2020).
Thus, Standex International has an ROCE of 8.3%. On its own, that’s a low figure but it’s around the 9.1% average generated by the Machinery industry.
In the above chart we have measured Standex International’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Standex International here for free.
How Are Returns Trending?
When we looked at the ROCE trend at Standex International, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 8.3% from 16% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Standex International’s ROCE
Bringing it all together, while we’re somewhat encouraged by Standex International’s reinvestment in its own business, we’re aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last five years. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.
On a separate note, we’ve found 1 warning sign for Standex International you’ll probably want to know about.
While Standex International may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
If you decide to trade Standex International, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.