Will the Promising Trends At Schaffer (ASX:SFC) Continue?

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Schaffer (ASX:SFC) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 Schaffer is:

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

0.16 = AU$32m ÷ (AU$243m - AU$40m) (Based on the trailing twelve months to June 2020).

Thus, Schaffer has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Auto Components industry average of 15%.

See our latest analysis for Schaffer

Historical performance is a great place to start when researching a stock so above you can see the gauge for Schaffer's ROCE against it's prior returns. If you're interested in investigating Schaffer's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Schaffer's ROCE Trending?

The trends we've noticed at Schaffer are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 43%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

All in all, it's terrific to see that Schaffer is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 369% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Schaffer, we've discovered 3 warning signs that you should be aware of.

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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