Spring Ventures' (TLV:SPRG) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Spring Ventures (TLV:SPRG) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Spring Ventures is:

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

0.17 = ₪14m ÷ (₪82m - ₪1.7m) (Based on the trailing twelve months to December 2020).

Therefore, Spring Ventures has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 12% generated by the Online Retail industry.

View our latest analysis for Spring Ventures

Historical performance is a great place to start when researching a stock so above you can see the gauge for Spring Ventures' ROCE against it's prior returns. If you'd like to look at how Spring Ventures has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that Spring Ventures is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 17% on its capital. In addition to that, Spring Ventures is employing 399% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 2.1%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Spring Ventures has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

Long story short, we're delighted to see that Spring Ventures' reinvestment activities have paid off and the company is now profitable. And a remarkable 129% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Spring Ventures can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 4 warning signs we've spotted with Spring Ventures (including 1 which makes us a bit uncomfortable) .

While Spring Ventures isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.
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