SP Group's (CPH:SPG) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at SP Group (CPH:SPG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for SP Group, this is the formula:

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

0.12 = kr.261m ÷ (kr.3.1b - kr.843m) (Based on the trailing twelve months to March 2024).

Thus, SP Group has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 11%.

View our latest analysis for SP Group

Above you can see how the current ROCE for SP Group 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 analyst report for SP Group .

The Trend Of ROCE

On the surface, the trend of ROCE at SP Group doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 12%. However it looks like SP Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On SP Group's ROCE

Bringing it all together, while we're somewhat encouraged by SP Group's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 21% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

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

While SP Group 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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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.