If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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 Sats (OB:SATS) 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. Analysts use this formula to calculate it for Sats:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = kr277m ÷ (kr9.0b - kr2.0b) (Based on the trailing twelve months to June 2023).
Therefore, Sats has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 6.3%.
View our latest analysis for Sats
In the above chart we have measured Sats' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sats.
What The Trend Of ROCE Can Tell Us
In terms of Sats' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.0% from 10% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Sats' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Sats is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 35% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Sats could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Sats 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.
About OB:SATS
Sats
Provides fitness and training services in Norway, Sweden, Denmark, and Finland.
High growth potential with solid track record.
