Sescom's (WSE:SES) Returns On Capital Not Reflecting Well On The Business

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Sescom (WSE:SES) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Sescom:

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

0.087 = zł4.6m ÷ (zł75m - zł22m) (Based on the trailing twelve months to March 2021).

Therefore, Sescom has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the IT industry average of 14%.

View 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're interested in investigating Sescom's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Sescom's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.7% from 29% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Sescom's ROCE

We're a bit apprehensive about Sescom because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 147% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 2 warning signs for Sescom that we think you should be aware of.

While Sescom 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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