SFC Energy (ETR:F3C) Is Doing The Right Things To Multiply Its Share Price

By
Simply Wall St
Published
January 25, 2022
XTRA:F3C
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in SFC Energy's (ETR:F3C) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on SFC Energy is:

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

0.034 = €2.3m ÷ (€86m - €18m) (Based on the trailing twelve months to September 2021).

Thus, SFC Energy has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.2%.

See our latest analysis for SFC Energy

roce
XTRA:F3C Return on Capital Employed January 25th 2022

Above you can see how the current ROCE for SFC Energy 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.

How Are Returns Trending?

We're delighted to see that SFC Energy is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 3.4% which is a sight for sore eyes. Not only that, but the company is utilizing 220% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

To the delight of most shareholders, SFC Energy has now broken into profitability. And a remarkable 719% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching SFC Energy, you might be interested to know about the 1 warning sign that our analysis has discovered.

While SFC Energy 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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