SG Fleet Group's (ASX:SGF) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at SG Fleet Group (ASX:SGF) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on SG Fleet Group is:

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

0.12 = AU$75m ÷ (AU$833m - AU$191m) (Based on the trailing twelve months to June 2021).

Therefore, SG Fleet Group has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Commercial Services industry average of 10%.

Check out our latest analysis for SG Fleet Group

Above you can see how the current ROCE for SG Fleet Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is SG Fleet Group's ROCE Trending?

When we looked at the ROCE trend at SG Fleet Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 20% five years ago. However it looks like SG Fleet Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line On SG Fleet Group's ROCE

Bringing it all together, while we're somewhat encouraged by SG Fleet Group's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to continue researching SG Fleet Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

While SG Fleet Group 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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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.