Here's What To Make Of SMU's (SNSE:SMU) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating SMU (SNSE:SMU), we don't think it's current trends fit the mold of a multi-bagger.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

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. To calculate this metric for SMU, this is the formula:

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

0.068 = CL$123b ÷ (CL$2.5t - CL$683b) (Based on the trailing twelve months to December 2024).

Therefore, SMU has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 12%.

Check out our latest analysis for SMU

In the above chart we have measured SMU'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 analyst report for SMU .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at SMU. The company has consistently earned 6.8% for the last five years, and the capital employed within the business has risen 20% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On SMU's ROCE

In conclusion, SMU has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 96% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 3 warning signs for SMU (1 is a bit concerning) you should be aware of.

While SMU 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.

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.