ScS Group (LON:SCS) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating ScS Group (LON:SCS), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on ScS Group is:

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

0.13 = UK£18m ÷ (UK£216m - UK£78m) (Based on the trailing twelve months to July 2022).

Therefore, ScS Group has an ROCE of 13%. That's a pretty standard return and it's in line with the industry average of 13%.

See our latest analysis for ScS Group

In the above chart we have measured ScS Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of ScS Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 29% five years ago. However it looks like ScS Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, ScS Group has decreased its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On ScS Group's ROCE

To conclude, we've found that ScS Group is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 11% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 4 warning signs we've spotted with ScS Group (including 1 which can't be ignored) .

While ScS Group 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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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.