Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, we’ve noticed some promising trends at Servotronics (NYSEMKT:SVT) so let’s look a bit deeper.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Servotronics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$5.3m ÷ (US$52m – US$8.8m) (Based on the trailing twelve months to March 2020).
So, Servotronics has an ROCE of 12%. In absolute terms, that’s a satisfactory return, but compared to the Electrical industry average of 9.3% it’s much better.
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 Servotronics, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
The trends we’ve noticed at Servotronics are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 52% more capital is being employed now too. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
What We Can Learn From Servotronics’ ROCE
To sum it up, Servotronics has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 26% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 5 warning signs for Servotronics (of which 1 is significant!) that you should know about.
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.
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