The Trends At Snowman Logistics (NSE:SNOWMAN) That You Should Know About

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Snowman Logistics (NSE:SNOWMAN), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Snowman Logistics is:

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

0.017 = ₹102m ÷ (₹6.3b - ₹393m) (Based on the trailing twelve months to September 2020).

So, Snowman Logistics has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Logistics industry average of 12%.

Check out our latest analysis for Snowman Logistics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Snowman Logistics, check out these free graphs here.

What Can We Tell From Snowman Logistics' ROCE Trend?

In terms of Snowman Logistics' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.5%, but since then they've fallen to 1.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Snowman Logistics' ROCE

Bringing it all together, while we're somewhat encouraged by Snowman Logistics' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 58% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Snowman Logistics does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Snowman Logistics 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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