The Return Trends At Speedy Hire (LON:SDY) Look Promising

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Speedy Hire's (LON:SDY) returns on capital, so let's have a look.

Understanding 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 Speedy Hire:

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

0.092 = UK£32m ÷ (UK£454m - UK£109m) (Based on the trailing twelve months to September 2020).

Thus, Speedy Hire has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 12%.

View our latest analysis for Speedy Hire

In the above chart we have measured Speedy Hire'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 Speedy Hire.

What Can We Tell From Speedy Hire's ROCE Trend?

Speedy Hire's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 26% over the last five years. 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.

What We Can Learn From Speedy Hire's ROCE

In summary, we're delighted to see that Speedy Hire has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 114% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

Speedy Hire does have some risks though, and we've spotted 2 warning signs for Speedy Hire that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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