Investors Will Want SergeFerrari Group's (EPA:SEFER) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in SergeFerrari Group's (EPA:SEFER) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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 SergeFerrari Group, this is the formula:

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

0.09 = €21m ÷ (€340m - €105m) (Based on the trailing twelve months to June 2022).

So, SergeFerrari Group has an ROCE of 9.0%. On its own, that's a low figure but it's around the 8.4% average generated by the Chemicals industry.

View our latest analysis for SergeFerrari Group

Above you can see how the current ROCE for SergeFerrari Group 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 SergeFerrari Group here for free.

What Does the ROCE Trend For SergeFerrari Group Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 9.0%. The amount of capital employed has increased too, by 86%. So we're very much inspired by what we're seeing at SergeFerrari Group thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that SergeFerrari Group is reaping the rewards from prior investments and is growing its capital base. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

SergeFerrari Group does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.

While SergeFerrari Group 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.