Supply Network Limited (ASX:SNL): Assessing Capital Returns

I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Supply Network Limited (ASX:SNL) stock.

If you purchase a SNL share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to SNL’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Supply Network is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

Check out our latest analysis for Supply Network

Calculating Return On Capital Employed for SNL

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business' ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Supply Network's capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Supply Network’s ROCE for you below:

SNL’s 29.50% ROCE means that for every A$100 you invest, the company creates A$29.5. This shows Supply Network provides a great return on capital employed that is well above the 15% ROCE that is typically considered to be a strong benchmark. As a result, if SNL is clever with their reinvestments or dividend payments, investors can grow their capital at an enviable rate over time.

Not so fast

Supply Network's relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Supply Network is in a favourable position, but this can change if these factors underperform. Because of this, it is important to look beyond the final value of SNL’s ROCE and understand what is happening to the individual components. Three years ago, SNL’s ROCE was 28.31%, which means the company's capital returns have improved. Similarly, the movement in the earnings variable shows a jump from AU$8.30m to AU$10.82m whilst capital employed also increased but to a smaller extent, which means the company has been able to improve ROCE by driving up earnings relative to the capital invested in the business.

Next Steps

SNL's investors have enjoyed an upward trend in ROCE and it is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. This is an ideal situation to be in, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. If you're interested in diving deeper, take a look at what I've linked below for further information on these fundamentals and other potential investment opportunities.

1. Future Outlook: What are well-informed industry analysts predicting for SNL’s future growth? Take a look at our free research report of analyst consensus for SNL’s outlook.
2. Valuation: What is SNL worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SNL is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.