We Like These Underlying Return On Capital Trends At SAF-Holland (ETR:SFQ)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at SAF-Holland (ETR:SFQ) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for SAF-Holland, this is the formula:

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

0.14 = €181m ÷ (€1.7b - €371m) (Based on the trailing twelve months to December 2023).

So, SAF-Holland has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Auto Components industry.

See our latest analysis for SAF-Holland

In the above chart we have measured SAF-Holland'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 SAF-Holland .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from SAF-Holland. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 62%. So we're very much inspired by what we're seeing at SAF-Holland thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that SAF-Holland can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 77% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing SAF-Holland, we've discovered 2 warning signs that you should be aware of.

While SAF-Holland 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.