Returns On Capital Signal Tricky Times Ahead For SDI Group (LON:SDI)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating SDI Group (LON:SDI), we don't think it's current trends fit the mold of a multi-bagger.

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What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for SDI Group, this is the formula:

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

0.082 = UK£6.3m ÷ (UK£86m - UK£9.6m) (Based on the trailing twelve months to October 2024).

Thus, SDI Group has an ROCE of 8.2%. On its own, that's a low figure but it's around the 10.0% average generated by the Electronic industry.

See our latest analysis for SDI Group

In the above chart we have measured SDI Group'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 analyst report for SDI Group .

What Does the ROCE Trend For SDI Group Tell Us?

When we looked at the ROCE trend at SDI Group, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 8.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From SDI Group's ROCE

Bringing it all together, while we're somewhat encouraged by SDI Group's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 60% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

SDI Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for SDI on our platform quite valuable.

While SDI 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.