Returns Are Gaining Momentum At Socfinasia (BDL:SCFNS)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, Socfinasia (BDL:SCFNS) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Socfinasia is:

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

0.082 = €24m ÷ (€346m - €50m) (Based on the trailing twelve months to June 2020).

Therefore, Socfinasia has an ROCE of 8.2%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

See our latest analysis for Socfinasia

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Socfinasia has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Socfinasia has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 83% over the trailing five years. The company is now earning €0.08 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 69% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 14% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Socfinasia's ROCE

In a nutshell, we're pleased to see that Socfinasia has been able to generate higher returns from less capital. And since the stock has fallen 19% 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.

Like most companies, Socfinasia does come with some risks, and we've found 2 warning signs that you should be aware of.

While Socfinasia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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