SMCP (EPA:SMCP) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating SMCP (EPA:SMCP), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.057 = €109m ÷ (€2.4b - €477m) (Based on the trailing twelve months to June 2022).

Thus, SMCP has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 8.5%.

View our latest analysis for SMCP

Above you can see how the current ROCE for SMCP 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 SMCP.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at SMCP, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.7% from 7.6% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On SMCP's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that SMCP is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 58% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing SMCP, we've discovered 1 warning sign that you should be aware of.

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.