Should We Be Excited About The Trends Of Returns At SG Fleet Group (ASX:SGF)?

If you're looking for a multi-bagger, there's a few things to 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. 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. 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$61m ÷ (AU$681m - AU$170m) (Based on the trailing twelve months to June 2020).

Thus, SG Fleet Group has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

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'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?

In terms of SG Fleet Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 26% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On SG Fleet Group's ROCE

In summary, we're somewhat concerned by SG Fleet Group's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 15% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 4 warning signs for SG Fleet Group that we think you should be aware of.

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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