Why The 30% Return On Capital At Sanlorenzo (BIT:SL) Should Have Your Attention

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at the ROCE trend of Sanlorenzo (BIT:SL) we really liked what we saw.

What Is 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 Sanlorenzo, this is the formula:

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

0.30 = €126m ÷ (€870m - €453m) (Based on the trailing twelve months to March 2024).

Thus, Sanlorenzo has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Leisure industry average of 16%.

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, you can check out the forecasts from the analysts covering Sanlorenzo for free.

So How Is Sanlorenzo's ROCE Trending?

Sanlorenzo is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 30%. 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 130%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Sanlorenzo's current liabilities are still rather high at 52% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Sanlorenzo has. Since the stock has returned a solid 89% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Sanlorenzo does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.