SafeCharge International Group Limited (LON:SCH)’s Return on Capital

This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in SafeCharge International Group Limited (LON:SCH).

If you purchase a SCH share you are effectively becoming a partner with many other shareholders. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in SafeCharge International Group, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

See our latest analysis for SafeCharge International Group

SafeCharge International Group’s Return On Capital Employed

As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if SafeCharge International Group is good at growing investor capital. Take a look at the formula box beneath:

ROCE Calculation for SCH

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US$28.95m ÷ (US$182.19m – US$25.09m) = 18.43%

SCH’s 18.43% ROCE means that for every £100 you invest, the company creates £18.4. This shows SafeCharge International Group provides a favourable return to capital holders, which beats the 15% ROCE that is typically considered to be a strong benchmark. As a result, if SCH is clever with their reinvestments or dividend payments, investors can grow their capital at an attractive rate over time.

AIM:SCH Last Perf July 12th 18
AIM:SCH Last Perf July 12th 18

A deeper look

Although SafeCharge International Group is in a favourable position, you should know that this could change if the company is unable to maintain a strong ROCE above the benchmark, which will depend on the behaviour of the underlying variables (EBT and capital employed). Because of this, it is important to look beyond the final value of SCH’s ROCE and understand what is happening to the individual components. Looking three years in the past, it is evident that SCH’s ROCE has risen from 11.07%, indicating the company’s capital returns have stengthened. With this, the current earnings of US$28.95m improved from US$16.72m and the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

Next Steps

SafeCharge International Group’s ROCE has increased in the recent past and is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you don’t pay attention to these factors you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

  1. Future Outlook: What are well-informed industry analysts predicting for SCH’s future growth? Take a look at our free research report of analyst consensus for SCH’s outlook.
  2. Valuation: What is SCH worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SCH is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.