Returns On Capital Signal Tricky Times Ahead For Sevenet (WSE:SEV)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Sevenet (WSE:SEV), it didn't seem to tick all of these boxes.

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 Sevenet is:

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

0.074 = zł5.9m ÷ (zł127m - zł47m) (Based on the trailing twelve months to September 2023).

So, Sevenet has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

View 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'd like to look at how Sevenet 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 Sevenet Tell Us?

On the surface, the trend of ROCE at Sevenet doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.4% from 30% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Sevenet's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sevenet is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 279% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Sevenet does have some risks, we noticed 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

While Sevenet 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.