SigmaRoc's (LON:SRC) Returns On Capital Not Reflecting Well On The Business

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think SigmaRoc (LON:SRC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on SigmaRoc is:

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

0.029 = UK£51m ÷ (UK£2.2b - UK£405m) (Based on the trailing twelve months to June 2024).

Thus, SigmaRoc has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 8.6%.

See our latest analysis for SigmaRoc

In the above chart we have measured SigmaRoc's 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 SigmaRoc for free.

The Trend Of ROCE

We weren't thrilled with the trend because SigmaRoc's ROCE has reduced by 44% over the last five years, while the business employed 1,664% more capital. Usually this isn't ideal, but given SigmaRoc conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence SigmaRoc might not have received a full period of earnings contribution from it.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that SigmaRoc is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 57% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 1 warning sign for SigmaRoc that we think you should be aware of.

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. 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.