Sescom (WSE:SES) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Sescom (WSE:SES) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. The formula for this calculation on Sescom is:

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

0.068 = zł3.7m ÷ (zł78m - zł24m) (Based on the trailing twelve months to December 2021).

Thus, Sescom has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 14%.

Check out our latest analysis for Sescom

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sescom's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sescom, check out these free graphs here.

What Can We Tell From Sescom's ROCE Trend?

When we looked at the ROCE trend at Sescom, we didn't gain much confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 6.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Sescom's ROCE

To conclude, we've found that Sescom is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 3.1% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Sescom does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Sescom isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.