Capital Allocation Trends At Société pour l'Informatique Industrielle SII (EPA:SII) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Société pour l'Informatique Industrielle SII (EPA:SII) 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)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Société pour l'Informatique Industrielle SII:

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

0.13 = €31m ÷ (€439m - €192m) (Based on the trailing twelve months to September 2020).

Thus, Société pour l'Informatique Industrielle SII has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 12%.

View our latest analysis for Société pour l'Informatique Industrielle SII

Above you can see how the current ROCE for Société pour l'Informatique Industrielle SII compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Société pour l'Informatique Industrielle SII here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Société pour l'Informatique Industrielle SII, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 13%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Société pour l'Informatique Industrielle SII has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, Société pour l'Informatique Industrielle SII is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 147% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Société pour l'Informatique Industrielle SII does have some risks though, and we've spotted 1 warning sign for Société pour l'Informatique Industrielle SII that you might be interested in.

While Société pour l'Informatique Industrielle SII 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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