SALA's (TSE:2734) Returns Have Hit A Wall

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at SALA (TSE:2734), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on SALA is:

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

0.045 = JP¥6.3b ÷ (JP¥202b - JP¥63b) (Based on the trailing twelve months to November 2024).

So, SALA has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 5.9%.

See our latest analysis for SALA

Historical performance is a great place to start when researching a stock so above you can see the gauge for SALA's ROCE against it's prior returns. If you're interested in investigating SALA's past further, check out this free graph covering SALA's past earnings, revenue and cash flow .

What The Trend Of ROCE Can Tell Us

Over the past five years, SALA's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect SALA to be a multi-bagger going forward.

In Conclusion...

We can conclude that in regards to SALA's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 62% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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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.