There Are Reasons To Feel Uneasy About Sano Bruno's Enterprises' (TLV:SANO1) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Sano Bruno's Enterprises (TLV:SANO1), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Sano Bruno's Enterprises is:

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

0.10 = ₪187m ÷ (₪2.3b - ₪471m) (Based on the trailing twelve months to March 2023).

So, Sano Bruno's Enterprises has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.

See our latest analysis for Sano Bruno's Enterprises

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sano Bruno's Enterprises' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sano Bruno's Enterprises, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Sano Bruno's Enterprises doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 20% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Our Take On Sano Bruno's Enterprises' ROCE

To conclude, we've found that Sano Bruno's Enterprises is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 40% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 1 warning sign facing Sano Bruno's Enterprises that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.