Returns On Capital Are Showing Encouraging Signs At SMU (SNSE:SMU)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in SMU's (SNSE:SMU) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on SMU is:

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

0.063 = CL$100b ÷ (CL$2.2t - CL$604b) (Based on the trailing twelve months to December 2020).

Therefore, SMU has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 10%.

View our latest analysis for SMU

Above you can see how the current ROCE for SMU compares to its prior returns on capital, but there's only so much you can tell from the past. 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 SMU's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 6.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From SMU's ROCE

To sum it up, SMU has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 33% in the last three years. So researching this company further and determining whether or not these trends will continue seems justified.

SMU does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

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