SMU (SNSE:SMU) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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.

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. Analysts use this formula to calculate it for SMU:

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

0.10 = CL$167b ÷ (CL$2.3t - CL$633b) (Based on the trailing twelve months to September 2022).

Thus, SMU has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Consumer Retailing industry.

Check out 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'd like, you can check out the forecasts from the analysts covering SMU here for free.

So How Is SMU's ROCE Trending?

The trends we've noticed at SMU are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 32%. So we're very much inspired by what we're seeing at SMU thanks to its ability to profitably reinvest capital.

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. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about SMU, we've spotted 4 warning signs, and 1 of them can't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.