SMCP's (EPA:SMCP) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Understanding 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)

0.029 = €56m ÷ (€2.4b - €505m) (Based on the trailing twelve months to June 2021).

Therefore, SMCP has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.8%.

See 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 Can We Tell From SMCP's ROCE Trend?

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 2.9% from 9.6% five years ago. However it looks like SMCP might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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. And in the last three years, the stock has given away 48% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think SMCP has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with SMCP and understanding this should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.