We Like These Underlying Trends At Smart Parking (ASX:SPZ)

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Smart Parking (ASX:SPZ) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Smart Parking:

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

0.067 = AU$2.0m ÷ (AU$39m - AU$8.4m) (Based on the trailing twelve months to December 2020).

Therefore, Smart Parking has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 30%.

See our latest analysis for Smart Parking

Above you can see how the current ROCE for Smart Parking 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 Smart Parking.

What The Trend Of ROCE Can Tell Us

The fact that Smart Parking is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 6.7% which is a sight for sore eyes. Not only that, but the company is utilizing 117% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 22%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Smart Parking has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Smart Parking's ROCE

To the delight of most shareholders, Smart Parking has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 40% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Smart Parking does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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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