Investors Met With Slowing Returns on Capital At Semapa - Sociedade de Investimento e Gestão SGPS (ELI:SEM)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 Semapa - Sociedade de Investimento e Gestão SGPS (ELI:SEM), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Semapa - Sociedade de Investimento e Gestão SGPS:

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

0.079 = €213m ÷ (€3.7b - €1.0b) (Based on the trailing twelve months to June 2021).

Thus, Semapa - Sociedade de Investimento e Gestão SGPS has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.8% average generated by the Forestry industry.

View our latest analysis for Semapa - Sociedade de Investimento e Gestão SGPS

Above you can see how the current ROCE for Semapa - Sociedade de Investimento e Gestão SGPS compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Over the past five years, Semapa - Sociedade de Investimento e Gestão SGPS' ROCE has remained relatively flat while the business is using 22% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 7.9%, it's hard to get excited about these developments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 27% of total assets, this reported ROCE would probably be less than7.9% because total capital employed would be higher.The 7.9% ROCE could be even lower if current liabilities weren't 27% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line

Overall, we're not ecstatic to see Semapa - Sociedade de Investimento e Gestão SGPS reducing the amount of capital it employs in the business. And with the stock having returned a mere 9.3% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know more about Semapa - Sociedade de Investimento e Gestão SGPS, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Semapa - Sociedade de Investimento e Gestão SGPS isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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