There Are Reasons To Feel Uneasy About Sicily by Car's (BIT:SBC) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Sicily by Car (BIT:SBC), it didn't seem to tick all of these boxes.

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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. Analysts use this formula to calculate it for Sicily by Car:

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

0.055 = €10m ÷ (€289m - €106m) (Based on the trailing twelve months to June 2024).

Thus, Sicily by Car has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Transportation industry average of 7.1%.

View our latest analysis for Sicily by Car

Above you can see how the current ROCE for Sicily by Car 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 Sicily by Car for free.

What The Trend Of ROCE Can Tell Us

In terms of Sicily by Car's historical ROCE movements, the trend isn't fantastic. Over the last one year, returns on capital have decreased to 5.5% from 28% one year ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Sicily by Car have fallen, meanwhile the business is employing more capital than it was one year ago. Investors haven't taken kindly to these developments, since the stock has declined 65% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

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

While Sicily by Car 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.

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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.