There Are Reasons To Feel Uneasy About SG Fleet Group's (ASX:SGF) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating SG Fleet Group (ASX:SGF), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for SG Fleet Group, this is the formula:

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).

So, SG Fleet Group has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Commercial Services industry.

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'd like to see what analysts are forecasting going forward, you should check out our free report for SG Fleet Group.

How Are Returns Trending?

In terms of SG Fleet Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 20% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that SG Fleet Group is reinvesting in the business, but returns have been falling. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. 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.

SG Fleet Group does have some risks though, and we've spotted 3 warning signs for SG Fleet Group that you might be interested in.

While SG Fleet Group 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.

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.

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