This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on Shaver Shop Group Limited (ASX:SSG) stock.
Purchasing Shaver Shop Group gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently Shaver Shop Group 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.
ROCE: Explanation and Calculation
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. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Shaver Shop Group is good at growing investor capital. SSG’s ROCE is calculated below:
ROCE Calculation for SSG
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = AU$9.7m ÷ (AU$89.8m – AU$27.7m) = 15.6%
SSG’s 15.6% ROCE means that for every A$100 you invest, the company creates A$15.6. This shows Shaver Shop Group provides a favourable return to capital holders, which beats the 15% ROCE that is typically considered to be a strong benchmark. As a result, if SSG is clever with their reinvestments or dividend payments, investors can grow their capital at an attractive rate over time.
Can any of this change?
SSG is efficient with the use of capital, but this is only the case if SSG continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. Because of this, it is important to look beyond the final value of SSG’s ROCE and understand what is happening to the individual components. Looking three years in the past, it is evident that SSG’s ROCE has risen from 15.1%, indicating the company’s capital returns have stengthened. Similarly, the movement in the earnings variable shows a jump from AU$6.5m to AU$9.7m whilst capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business’ use of capital.
Shaver Shop Group’s ROCE has increased in the recent past and is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. This makes the company an attractive place to put your money, but ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. It’s important to account for these factors because 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. Shaver Shop Group’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for SSG’s future growth? Take a look at our free research report of analyst consensus for SSG’s outlook.
- Valuation: What is SSG 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 SSG is currently mispriced by the market.
- 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 email@example.com.