The Return Trends At SFC Energy (ETR:F3C) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 SFC Energy's (ETR:F3C) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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 SFC Energy, this is the formula:

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

0.013 = €857k ÷ (€90m - €24m) (Based on the trailing twelve months to March 2021).

Therefore, SFC Energy has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 12%.

See our latest analysis for SFC Energy

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'd like to see what analysts are forecasting going forward, you should check out our free report for SFC Energy.

So How Is SFC Energy's ROCE Trending?

The fact that SFC Energy is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.3% on its capital. In addition to that, SFC Energy is employing 181% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In Conclusion...

Overall, SFC Energy gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 554% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching SFC Energy, you might be interested to know about the 2 warning signs that our analysis has discovered.

While SFC Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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