Safilo Group (BIT:SFL) Shareholders Will Want The ROCE Trajectory To Continue
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Safilo Group's (BIT:SFL) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Safilo Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = €64m ÷ (€1b - €337m) (Based on the trailing twelve months to December 2022).
Thus, Safilo Group has an ROCE of 9.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.9%.
See our latest analysis for Safilo Group
Above you can see how the current ROCE for Safilo Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Safilo Group.
What Does the ROCE Trend For Safilo Group Tell Us?
Like most people, we're pleased that Safilo Group is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 37%. Safilo Group could be selling under-performing assets since the ROCE is improving.
From what we've seen above, Safilo Group has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 42% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Safilo Group does have some risks though, and we've spotted 1 warning sign for Safilo Group that you might be interested in.
While Safilo Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Valuation is complex, but we're helping make it simple.
Find out whether Safilo Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Safilo Group S.p.A. engages in the design, production, wholesale, and retail distribution of products for the eyewear market in North America, Europe, the Asia Pacific, and internationally.
Solid track record with excellent balance sheet.