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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Sakuma Exports (NSE:SAKUMA) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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 Sakuma Exports is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = ₹202m ÷ (₹5.1b - ₹1.3b) (Based on the trailing twelve months to December 2021).
Therefore, Sakuma Exports has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 12%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Sakuma Exports, check out these free graphs here.
What Does the ROCE Trend For Sakuma Exports Tell Us?
We weren't thrilled with the trend because Sakuma Exports' ROCE has reduced by 82% over the last five years, while the business employed 157% more capital. That being said, Sakuma Exports raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Sakuma Exports probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a side note, Sakuma Exports has done well to pay down its current liabilities to 25% of total assets. Since the ratio used to be 82%, that's a significant reduction and it no doubt explains the drop in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On Sakuma Exports' ROCE
While returns have fallen for Sakuma Exports in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 81% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you'd like to know more about Sakuma Exports, we've spotted 4 warning signs, and 1 of them is a bit concerning.
While Sakuma Exports 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.