Returns On Capital Signal Tricky Times Ahead For Squirrel Media (BME:SQRL)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Squirrel Media (BME:SQRL), 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. The formula for this calculation on Squirrel Media is:

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

0.18 = €19m ÷ (€166m - €62m) (Based on the trailing twelve months to June 2024).

Thus, Squirrel Media has an ROCE of 18%. That's a pretty standard return and it's in line with the industry average of 18%.

See our latest analysis for Squirrel Media

Historical performance is a great place to start when researching a stock so above you can see the gauge for Squirrel Media's ROCE against it's prior returns. If you're interested in investigating Squirrel Media's past further, check out this free graph covering Squirrel Media's past earnings, revenue and cash flow.

So How Is Squirrel Media's ROCE Trending?

When we looked at the ROCE trend at Squirrel Media, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 33% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Squirrel Media'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 Squirrel Media. These growth trends haven't led to growth returns though, since the stock has fallen 59% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing Squirrel Media, we've discovered 1 warning sign that you should be aware of.

While Squirrel Media 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.