Many Would Be Envious Of Somfy's (EPA:SO) Excellent Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. That's why when we briefly looked at Somfy's (EPA:SO) ROCE trend, we were very happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Somfy is:

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

0.26 = €372m ÷ (€1.7b - €289m) (Based on the trailing twelve months to June 2021).

Thus, Somfy has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Electrical industry average of 14%.

See our latest analysis for Somfy

Above you can see how the current ROCE for Somfy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Somfy here for free.

So How Is Somfy's ROCE Trending?

In terms of Somfy's history of ROCE, it's quite impressive. The company has employed 100% more capital in the last five years, and the returns on that capital have remained stable at 26%. Now considering ROCE is an attractive 26%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Somfy can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 17% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 141% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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