Returns On Capital At Safestyle UK (LON:SFE) Paint A Concerning Picture

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Safestyle UK (LON:SFE), it didn't seem to tick all of these boxes.

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. To calculate this metric for Safestyle UK, this is the formula:

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

0.17 = UK£8.1m ÷ (UK£73m - UK£24m) (Based on the trailing twelve months to January 2022).

Thus, Safestyle UK has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 15% generated by the Building industry.

Check out our latest analysis for Safestyle UK

In the above chart we have measured Safestyle UK's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Safestyle UK.

What Can We Tell From Safestyle UK's ROCE Trend?

On the surface, the trend of ROCE at Safestyle UK doesn't inspire confidence. To be more specific, ROCE has fallen from 48% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Safestyle UK's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Safestyle UK is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 85% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

Like most companies, Safestyle UK does come with some risks, and we've found 1 warning sign that you should be aware of.

While Safestyle UK 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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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.