The Returns At SIMONA (FRA:SIM) Provide Us With Signs Of What's To Come

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at SIMONA (FRA:SIM) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on SIMONA is:

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

0.062 = €24m ÷ (€447m - €63m) (Based on the trailing twelve months to June 2020).

Therefore, SIMONA has an ROCE of 6.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.

Check out our latest analysis for SIMONA

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating SIMONA's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at SIMONA. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 6.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On SIMONA's ROCE

As we've seen above, SIMONA's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 66% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

While SIMONA 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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This article by Simply Wall St is general in nature. 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.
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