What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Safilo Group (BIT:SFL) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.062 = €37m ÷ (€939m - €340m) (Based on the trailing twelve months to June 2021).
Thus, Safilo Group has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.3%.
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'd like to see what analysts are forecasting going forward, you should check out our free report for Safilo Group.
What Can We Tell From Safilo Group's ROCE Trend?
You'd find it hard not to be impressed with the ROCE trend at Safilo Group. The figures show that over the last five years, returns on capital have grown by 37%. The company is now earning €0.06 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 51% less capital than it was five years ago. Safilo Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 36% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
Our Take 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 66% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Safilo Group does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.
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.
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.
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