We're Watching These Trends At Somec (BIT:SOM)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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 Somec (BIT:SOM), it didn't seem to tick all of these boxes.

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 Somec is:

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

0.065 = €8.9m ÷ (€247m - €111m) (Based on the trailing twelve months to June 2020).

So, Somec has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Building industry average of 10%.

Check out our latest analysis for Somec

Above you can see how the current ROCE for Somec compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Somec's historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 11%, but since then they've fallen to 6.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Somec has decreased its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

Our Take On Somec's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Somec. These growth trends haven't led to growth returns though, since the stock has fallen 27% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Somec does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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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