Returns Are Gaining Momentum At Sigdo Koppers (SNSE:SK)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Sigdo Koppers' (SNSE:SK) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Sigdo Koppers, this is the formula:

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

0.097 = US$298m ÷ (US$4.3b - US$1.2b) (Based on the trailing twelve months to March 2022).

So, Sigdo Koppers has an ROCE of 9.7%. On its own that's a low return, but compared to the average of 7.4% generated by the Industrials industry, it's much better.

Check out our latest analysis for Sigdo Koppers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sigdo Koppers' ROCE against it's prior returns. If you're interested in investigating Sigdo Koppers' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Sigdo Koppers' ROCE Trend?

Sigdo Koppers is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 80% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

In summary, we're delighted to see that Sigdo Koppers has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

Sigdo Koppers does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Sigdo Koppers may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.