Returns On Capital Signal Tricky Times Ahead For SergeFerrari Group (EPA:SEFER)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at SergeFerrari Group (EPA:SEFER) 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. The formula for this calculation on SergeFerrari Group is:

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

0.03 = €6.7m ÷ (€305m - €79m) (Based on the trailing twelve months to December 2020).

So, SergeFerrari Group has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.3%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for SergeFerrari Group.

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 6.4% five years ago, while capital employed has grown 82%. Usually this isn't ideal, but given SergeFerrari Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with SergeFerrari Group's earnings and if they change as a result from the capital raise.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by SergeFerrari Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 20% 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.

On a final note, we've found 4 warning signs for SergeFerrari Group that we think you should be aware of.

While SergeFerrari 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.
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