Is Simonds Farsons Cisk (MTSE:SFC) Likely To Turn Things Around?

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. In light of that, when we looked at Simonds Farsons Cisk (MTSE:SFC) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Simonds Farsons Cisk is:

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

0.052 = €8.3m ÷ (€184m - €26m) (Based on the trailing twelve months to July 2020).

So, Simonds Farsons Cisk has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 8.4%.

Check out our latest analysis for Simonds Farsons Cisk

Historical performance is a great place to start when researching a stock so above you can see the gauge for Simonds Farsons Cisk's ROCE against it's prior returns. If you'd like to look at how Simonds Farsons Cisk has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Simonds Farsons Cisk's ROCE Trend?

When we looked at the ROCE trend at Simonds Farsons Cisk, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.2% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Simonds Farsons Cisk's ROCE

In summary, we're somewhat concerned by Simonds Farsons Cisk's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 62% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Simonds Farsons Cisk (including 1 which is is concerning) .

While Simonds Farsons Cisk 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. 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.
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