Capital Investment Trends At Somero Enterprises (LON:SOM) Look Strong

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So, when we ran our eye over Somero Enterprises' (LON:SOM) trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Somero Enterprises, this is the formula:

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

0.47 = US$36m ÷ (US$91m - US$13m) (Based on the trailing twelve months to June 2023).

Thus, Somero Enterprises has an ROCE of 47%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

Check out our latest analysis for Somero Enterprises

In the above chart we have measured Somero Enterprises' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Somero Enterprises here for free.

What The Trend Of ROCE Can Tell Us

It's hard not to be impressed by Somero Enterprises' returns on capital. The company has consistently earned 47% for the last five years, and the capital employed within the business has risen 58% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Somero Enterprises can keep this up, we'd be very optimistic about its future.

The Key Takeaway

In short, we'd argue Somero Enterprises has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. However, over the last five years, the stock has only delivered a 8.0% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

If you'd like to know about the risks facing Somero Enterprises, we've discovered 2 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.