To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at SFS Group's (VTX:SFSN) look very promising so lets take a look.
Return On Capital Employed (ROCE): What is it?
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 SFS Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = CHF316m ÷ (CHF1.8b - CHF260m) (Based on the trailing twelve months to June 2021).
Thus, SFS Group has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Machinery industry average of 9.9%.
In the above chart we have measured SFS 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.
What Can We Tell From SFS Group's ROCE Trend?
We're pretty happy with how the ROCE has been trending at SFS Group. We found that the returns on capital employed over the last five years have risen by 208%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, SFS Group appears to been achieving more with less, since the business is using 23% less capital to run its operation. SFS Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Key Takeaway
In a nutshell, we're pleased to see that SFS Group has been able to generate higher returns from less capital. Since the stock has returned a solid 70% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if SFS Group can keep these trends up, it could have a bright future ahead.
SFS Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...
SFS Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.