We Like These Underlying Return On Capital Trends At S4 Capital (LON:SFOR)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, S4 Capital (LON:SFOR) looks quite promising in regards to its trends of return on capital.

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 S4 Capital, this is the formula:

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

0.022 = UK£29m ÷ (UK£1.8b - UK£501m) (Based on the trailing twelve months to June 2022).

So, S4 Capital has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Media industry average of 12%.

See our latest analysis for S4 Capital

In the above chart we have measured S4 Capital'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 S4 Capital here for free.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last three years to 2.2%. The amount of capital employed has increased too, by 161%. So we're very much inspired by what we're seeing at S4 Capital thanks to its ability to profitably reinvest capital.

The Bottom Line On S4 Capital's ROCE

To sum it up, S4 Capital has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 4.4% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we found 2 warning signs for S4 Capital (1 is a bit unpleasant) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.