Why The 21% Return On Capital At SFS Group (VTX:SFSN) Should Have Your Attention

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at SFS Group's (VTX:SFSN) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).

Therefore, 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 8.6%.

Check out our latest analysis for SFS Group

Above you can see how the current ROCE for SFS Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SFS Group here for free.

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at SFS Group. The data shows that returns on capital have increased by 208% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. 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. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In Conclusion...

In the end, SFS Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 85% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.

If you want to know some of the risks facing SFS Group we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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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