Investors Will Want H C Slingsby's (LON:SLNG) Growth In ROCE To Persist

By
Simply Wall St
Published
December 25, 2021
AIM:SLNG
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at H C Slingsby (LON:SLNG) so let's look a bit deeper.

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. Analysts use this formula to calculate it for H C Slingsby:

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

0.08 = UK£777k ÷ (UK£14m - UK£4.6m) (Based on the trailing twelve months to June 2021).

So, H C Slingsby has an ROCE of 8.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 14%.

View our latest analysis for H C Slingsby

roce
AIM:SLNG Return on Capital Employed December 25th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for H C Slingsby's ROCE against it's prior returns. If you'd like to look at how H C Slingsby has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For H C Slingsby Tell Us?

Shareholders will be relieved that H C Slingsby has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 8.0% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

The Bottom Line

As discussed above, H C Slingsby appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 213% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

H C Slingsby does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While H C Slingsby 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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