Returns Are Gaining Momentum At Safilo Group (BIT:SFL)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Safilo Group (BIT:SFL) so let's look a bit deeper.

Understanding 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. Analysts use this formula to calculate it for Safilo Group:

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

0.08 = €50m ÷ (€938m - €311m) (Based on the trailing twelve months to December 2021).

Therefore, Safilo Group has an ROCE of 8.0%. On its own, that's a low figure but it's around the 8.6% average generated by the Luxury industry.

View our latest analysis for Safilo Group

In the above chart we have measured Safilo Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at Safilo Group. The data shows that returns on capital have increased by 165% over the trailing five years. The company is now earning €0.08 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 44% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line On Safilo Group's ROCE

In summary, it's great to see that Safilo Group has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 68% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 3 warning signs with Safilo Group and understanding these should be part of your investment process.

While Safilo Group 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.