S&T (ETR:SANT) May Have Issues Allocating Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at S&T (ETR:SANT), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for S&T:

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

0.083 = €64m ÷ (€1.2b - €460m) (Based on the trailing twelve months to June 2021).

Thus, S&T has an ROCE of 8.3%. On its own, that's a low figure but it's around the 10% average generated by the IT industry.

View our latest analysis for S&T

In the above chart we have measured S&T's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering S&T here for free.

So How Is S&T's ROCE Trending?

In terms of S&T's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.3% from 10% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On S&T's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for S&T. And long term investors must be optimistic going forward because the stock has returned a huge 153% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, S&T does come with some risks, and we've found 2 warning signs that you should be aware of.

While S&T 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. 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.
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