Investors Will Want SRP Groupe's (EPA:SRP) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in SRP Groupe's (EPA:SRP) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for SRP Groupe, this is the formula:

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

0.0017 = €379k ÷ (€420m - €202m) (Based on the trailing twelve months to June 2024).

Thus, SRP Groupe has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 8.0%.

Check out our latest analysis for SRP Groupe

Above you can see how the current ROCE for SRP Groupe compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for SRP Groupe .

So How Is SRP Groupe's ROCE Trending?

Shareholders will be relieved that SRP Groupe has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.2% on its capital. While returns have increased, the amount of capital employed by SRP Groupe has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

On a side note, SRP Groupe's current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On SRP Groupe's ROCE

To sum it up, SRP Groupe is collecting higher returns from the same amount of capital, and that's impressive. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 62% return over the last five years. In light of that, we think it's worth looking further into this stock because if SRP Groupe can keep these trends up, it could have a bright future ahead.

While SRP Groupe looks impressive, no company is worth an infinite price. The intrinsic value infographic for SRP helps visualize whether it is currently trading for a fair price.

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.