I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Sogefi SpA (BIT:SO) stock.
Purchasing Sogefi gives you an ownership stake in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to SO’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Sogefi’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
What is Return on Capital Employed (ROCE)?
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. To determine Sogefi’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). SO’s ROCE is calculated below:
ROCE Calculation for SO
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = €72m ÷ (€1.2b – €487m) = 11%
SO’s 11% ROCE means that for every €100 you invest, the company creates €10.5. A good ROCE hurdle you should aim for in your investments is 15%, which SO has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.
Then why have investors invested?
SO doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Because of this, it is important to look beyond the final value of SO’s ROCE and understand what is happening to the individual components. If you go back three years, you’ll find that SO’s ROCE has increased from 9.3%. Over the same period, EBT went from €64m to €72m and the amount of capital employed has decreased because of a larger reliance on current liabilities (more borrowed money) , which means that ROCE has increased as a result of Sogefi’s ability to grow earnings in conjunction with increased capital efficiency.
Although Sogefi’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate SO or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for SO’s future growth? Take a look at our free research report of analyst consensus for SO’s outlook.
- Valuation: What is SO worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether SO is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.