SergeFerrari Group's (EPA:SEFER) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. In light of that, when we looked at SergeFerrari Group (EPA:SEFER) and its ROCE trend, we weren't exactly thrilled.

Understanding 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)

0.025 = €5.7m ÷ (€305m - €79m) (Based on the trailing twelve months to December 2020).

Thus, SergeFerrari Group has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.0%.

View our latest analysis for SergeFerrari Group

In the above chart we have measured SergeFerrari Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SergeFerrari Group here for free.

So How Is SergeFerrari Group's ROCE Trending?

We weren't thrilled with the trend because SergeFerrari Group's ROCE has reduced by 61% over the last five years, while the business employed 82% more capital. That being said, SergeFerrari Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. 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.

What We Can Learn From SergeFerrari Group's ROCE

To conclude, we've found that SergeFerrari Group is reinvesting in the business, but returns have been falling. Since the stock has declined 38% 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.

SergeFerrari Group does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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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