The Returns At Skellerup Holdings (NZSE:SKL) Provide Us With Signs Of What's To Come

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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, when we ran our eye over Skellerup Holdings' (NZSE:SKL) trend of ROCE, we liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Skellerup Holdings:

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

0.16 = NZ$40m ÷ (NZ$284m - NZ$37m) (Based on the trailing twelve months to June 2020).

So, Skellerup Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Machinery industry.

See our latest analysis for Skellerup Holdings

Above you can see how the current ROCE for Skellerup Holdings 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 Skellerup Holdings here for free.

What Can We Tell From Skellerup Holdings' ROCE Trend?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 41% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that Skellerup Holdings has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Skellerup Holdings' ROCE

The main thing to remember is that Skellerup Holdings has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 275% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a separate note, we've found 2 warning signs for Skellerup Holdings you'll probably want to know about.

While Skellerup Holdings 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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