Should You Be Impressed By Sevenet's (WSE:SEV) Returns on Capital?

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Sevenet (WSE:SEV) looks decent, right now, so lets see what the trend of returns can tell us.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.12 = zł5.0m ÷ (zł102m - zł61m) (Based on the trailing twelve months to September 2020).

So, Sevenet has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the IT industry.

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 want to delve into the historical earnings, revenue and cash flow of Sevenet, check out these free graphs here.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 110% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 60% of total assets, this reported ROCE would probably be less than12% because total capital employed would be higher.The 12% ROCE could be even lower if current liabilities weren't 60% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

In Conclusion...

To sum it up, Sevenet has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 42% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a final note, we've found 3 warning signs for Sevenet that we think you should be aware of.

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. 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.
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