Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at SIG Group (VTX:SIGN), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for SIG Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = €249m ÷ (€7.8b - €1.8b) (Based on the trailing twelve months to December 2022).
Therefore, SIG Group has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 12%.
Check out our latest analysis for SIG Group
In the above chart we have measured SIG Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SIG Group.
SWOT Analysis for SIG Group
- Debt is well covered by earnings and cashflows.
- Earnings declined over the past year.
- Dividend is low compared to the top 25% of dividend payers in the Packaging market.
- Expensive based on P/S ratio and estimated fair value.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the Swiss market.
- Dividends are not covered by earnings.
- Revenue is forecast to grow slower than 20% per year.
What Does the ROCE Trend For SIG Group Tell Us?
The returns on capital haven't changed much for SIG Group in recent years. The company has employed 50% more capital in the last five years, and the returns on that capital have remained stable at 4.1%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 23% of total assets, this reported ROCE would probably be less than4.1% because total capital employed would be higher.The 4.1% ROCE could be even lower if current liabilities weren't 23% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
The Key Takeaway
In summary, SIG Group has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 77% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you'd like to know about the risks facing SIG Group, we've discovered 4 warning signs that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About SWX:SIGN
SIG Group
Provides aseptic carton packaging systems and solutions for beverage and liquid food products.
Proven track record and fair value.
