We're Watching These Trends At SG Fleet Group (ASX:SGF)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at SG Fleet Group (ASX:SGF) 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 SG Fleet Group, this is the formula:

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

0.12 = AU$61m ÷ (AU$681m - AU$170m) (Based on the trailing twelve months to June 2020).

So, SG Fleet Group has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Commercial Services industry.

Check out our latest analysis for SG Fleet Group

In the above chart we have measured SG Fleet Group's 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 SG Fleet Group.

What Does the ROCE Trend For SG Fleet Group Tell Us?

On the surface, the trend of ROCE at SG Fleet Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 26% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about SG Fleet Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. Unless these trends revert to a more positive trajectory, we would look elsewhere.

One more thing to note, we've identified 3 warning signs with SG Fleet Group and understanding them should be part of your investment process.

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.

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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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