Slowing Rates Of Return At SMCP (EPA:SMCP) Leave Little Room For Excitement

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 SMCP (EPA:SMCP) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.055 = €96m ÷ (€2.3b - €590m) (Based on the trailing twelve months to June 2023).

Therefore, SMCP has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 7.7%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at SMCP. The company has employed 21% more capital in the last five years, and the returns on that capital have remained stable at 5.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On SMCP's ROCE

Long story short, while SMCP has been reinvesting its capital, the returns that it's generating haven't increased. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 78% in the last five years. Therefore based on the analysis done in this article, we don't think SMCP has the makings of a multi-bagger.

SMCP does have some risks though, and we've spotted 1 warning sign for SMCP that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.