If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, SMU (SNSE:SMU) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)
0.092 = CL$146b ÷ (CL$2.2t - CL$627b) (Based on the trailing twelve months to December 2021).
Thus, SMU has an ROCE of 9.2%. On its own, that's a low figure but it's around the 9.6% average generated by the Consumer Retailing industry.
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'd like, you can check out the forecasts from the analysts covering SMU here for free.
What Does the ROCE Trend For SMU Tell Us?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.2%. The amount of capital employed has increased too, by 35%. So we're very much inspired by what we're seeing at SMU thanks to its ability to profitably reinvest capital.
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what SMU has. Given the stock has declined 29% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know about the risks facing SMU, we've discovered 3 warning signs that 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.
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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.