Why The 29% Return On Capital At Sanlorenzo (BIT:SL) Should Have Your Attention

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Sanlorenzo's (BIT:SL) look very promising so lets take 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 Sanlorenzo, this is the formula:

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

0.29 = €102m ÷ (€744m - €393m) (Based on the trailing twelve months to December 2022).

Thus, Sanlorenzo has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Leisure industry average of 18%.

See our latest analysis for Sanlorenzo

Above you can see how the current ROCE for Sanlorenzo 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 Sanlorenzo.

What Can We Tell From Sanlorenzo's ROCE Trend?

Sanlorenzo is displaying some positive trends. The data shows that returns on capital have increased substantially over the last four years to 29%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 103%. So we're very much inspired by what we're seeing at Sanlorenzo thanks to its ability to profitably reinvest capital.

Another thing to note, Sanlorenzo has a high ratio of current liabilities to total assets of 53%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Sanlorenzo's ROCE

To sum it up, Sanlorenzo has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Sanlorenzo and understanding this should be part of your investment process.

Sanlorenzo is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.