Sword Group (EPA:SWP) Is Looking To Continue Growing Its Returns On Capital

By
Simply Wall St
Published
May 25, 2021
ENXTPA:SWP
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Sword Group's (EPA:SWP) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Sword Group is:

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

0.11 = €21m ÷ (€235m - €44m) (Based on the trailing twelve months to December 2020).

Thus, Sword Group has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the IT industry.

View our latest analysis for Sword Group

roce
ENXTPA:SWP Return on Capital Employed May 26th 2021

Above you can see how the current ROCE for Sword Group 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 report on analyst forecasts for the company.

What Can We Tell From Sword Group's ROCE Trend?

Sword Group has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 22% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On Sword Group's ROCE

To bring it all together, Sword Group has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 143% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Sword Group (of which 2 are potentially serious!) that you should know about.

While Sword Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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