Sporting Clube de Braga - Futebol SAD (ELI:SCB) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Sporting Clube de Braga - Futebol SAD (ELI:SCB), we don't think it's current trends fit the mold of a multi-bagger.

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 Sporting Clube de Braga - Futebol SAD, this is the formula:

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

0.065 = €3.8m ÷ (€91m - €33m) (Based on the trailing twelve months to June 2022).

So, Sporting Clube de Braga - Futebol SAD has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Entertainment industry average of 13%.

Our analysis indicates that SCB is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sporting Clube de Braga - Futebol SAD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sporting Clube de Braga - Futebol SAD, check out these free graphs here.

The Trend Of ROCE

In terms of Sporting Clube de Braga - Futebol SAD's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Sporting Clube de Braga - Futebol SAD 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Sporting Clube de Braga - Futebol SAD has decreased its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Bottom Line

To conclude, we've found that Sporting Clube de Braga - Futebol SAD is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 210% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 2 warning signs with Sporting Clube de Braga - Futebol SAD and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.