Investors Could Be Concerned With Sevenet's (WSE:SEV) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think Sevenet (WSE:SEV) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Sevenet, this is the formula:

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

0.039 = zł3.8m ÷ (zł140m - zł42m) (Based on the trailing twelve months to June 2024).

Therefore, Sevenet has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the IT industry average of 15%.

See our latest analysis for Sevenet

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sevenet's ROCE against it's prior returns. If you're interested in investigating Sevenet's past further, check out this free graph covering Sevenet's past earnings, revenue and cash flow.

What Can We Tell From Sevenet's ROCE Trend?

When we looked at the ROCE trend at Sevenet, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Sevenet might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Sevenet has decreased its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, Sevenet is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 224% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Sevenet, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

While Sevenet 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.