Should We Be Excited About The Trends Of Returns At Scandinavian Brake Systems (CPH:SBS)?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Scandinavian Brake Systems (CPH:SBS), we don't think it's current trends fit the mold of a multi-bagger.

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 Scandinavian Brake Systems, this is the formula:

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

0.081 = kr.26m ÷ (kr.530m - kr.208m) (Based on the trailing twelve months to June 2020).

So, Scandinavian Brake Systems has an ROCE of 8.1%. In absolute terms, that's a low return, but it's much better than the Auto Components industry average of 6.2%.

Check out our latest analysis for Scandinavian Brake Systems

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'd like to look at how Scandinavian Brake Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Scandinavian Brake Systems Tell Us?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 30% in that same period. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 39% of total assets, this reported ROCE would probably be less than8.1% because total capital employed would be higher.The 8.1% ROCE could be even lower if current liabilities weren't 39% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

Our Take On Scandinavian Brake Systems' ROCE

In summary, Scandinavian Brake Systems isn't reinvesting funds back into the business and returns aren't growing. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Scandinavian Brake Systems we've found 6 warning signs (3 are significant!) that you should be aware of before investing here.

While Scandinavian Brake Systems 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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