SFD (WSE:SFD) Is Very Good At Capital Allocation

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of SFD (WSE:SFD) we really liked what we saw.

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 SFD is:

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

0.30 = zł15m ÷ (zł94m - zł46m) (Based on the trailing twelve months to June 2022).

Therefore, SFD has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Retail Distributors industry average of 13%.

Check out our latest analysis for SFD

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

What Does the ROCE Trend For SFD Tell Us?

Investors would be pleased with what's happening at SFD. Over the last five years, returns on capital employed have risen substantially to 30%. Basically the business is earning more per dollar of capital invested and in addition to that, 212% more capital is being employed now too. So we're very much inspired by what we're seeing at SFD thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 49%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line On SFD's ROCE

All in all, it's terrific to see that SFD is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 694% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if SFD can keep these trends up, it could have a bright future ahead.

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

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.