S.C. Artego (BVB:ARTE) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in S.C. Artego's (BVB:ARTE) returns on capital, so let's have a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for S.C. Artego, this is the formula:

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

0.16 = RON13m ÷ (RON124m - RON40m) (Based on the trailing twelve months to September 2021).

Thus, S.C. Artego has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 1.0% generated by the Machinery industry.

View our latest analysis for S.C. Artego

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

The Trend Of ROCE

S.C. Artego has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 23% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

One more thing to note, S.C. Artego has decreased current liabilities to 33% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From S.C. Artego's ROCE

To sum it up, S.C. Artego is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 213% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

S.C. Artego does have some risks though, and we've spotted 2 warning signs for S.C. Artego that you might be interested in.

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.