SDI Group (LON:SDI) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at SDI Group (LON:SDI) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 SDI Group, this is the formula:

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

0.19 = UK£6.2m ÷ (UK£49m - UK£16m) (Based on the trailing twelve months to April 2021).

Thus, SDI Group has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% 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, you can check out the forecasts from the analysts covering SDI Group here for free.

How Are Returns Trending?

The trends we've noticed at SDI Group are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 19%. The amount of capital employed has increased too, by 343%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 32% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From SDI Group's ROCE

All in all, it's terrific to see that SDI Group is reaping the rewards from prior investments and is growing its capital base. And a remarkable 1,166% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, SDI Group does come with some risks, and we've found 1 warning sign that you should be aware of.

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.

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.

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