Should We Be Excited About The Trends Of Returns At Grupo Sanborns. de (BMV:GSANBORB-1)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Grupo Sanborns. de (BMV:GSANBORB-1), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Grupo Sanborns. de, this is the formula:

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

0.056 = Mex$2.2b ÷ (Mex$50b - Mex$11b) (Based on the trailing twelve months to September 2020).

Thus, Grupo Sanborns. de has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.

See our latest analysis for Grupo Sanborns. de

Above you can see how the current ROCE for Grupo Sanborns. de 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 Grupo Sanborns. de here for free.

What Does the ROCE Trend For Grupo Sanborns. de Tell Us?

On the surface, the trend of ROCE at Grupo Sanborns. de doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 15% five years 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

We're a bit apprehensive about Grupo Sanborns. de because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing Grupo Sanborns. de that you might find interesting.

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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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