If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Seven Group Holdings (ASX:SVW) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Seven Group Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = AU$929m ÷ (AU$8.8b - AU$1.8b) (Based on the trailing twelve months to June 2021).
So, Seven Group Holdings has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Trade Distributors industry.
In the above chart we have measured Seven Group Holdings' 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 Seven Group Holdings here for free.
What Does the ROCE Trend For Seven Group Holdings Tell Us?
The trends we've noticed at Seven Group Holdings are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. 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 58%. So we're very much inspired by what we're seeing at Seven Group Holdings thanks to its ability to profitably reinvest capital.
The Bottom Line On Seven Group Holdings' ROCE
All in all, it's terrific to see that Seven Group Holdings is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 220% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we've spotted 2 warning signs facing Seven Group Holdings that you might find interesting.
While Seven Group Holdings 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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.