Should We Be Excited About The Trends Of Returns At SMCP (EPA:SMCP)?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at SMCP (EPA:SMCP), it didn't seem to tick all of these boxes.

What is 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 SMCP is:

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

0.013 = €30m ÷ (€2.7b - €370m) (Based on the trailing twelve months to June 2020).

Therefore, SMCP has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.7%.

Check out our latest analysis for SMCP

In the above chart we have measured SMCP'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 SMCP here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at SMCP, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.0% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From SMCP's ROCE

To conclude, we've found that SMCP is reinvesting in the business, but returns have been falling. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 76% in the last three years. 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.

SMCP does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While SMCP 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. 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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