What are the early trends we should look for to identify a stock that could 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at SC IAMU (BVB:IAMU) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for SC IAMU, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = RON2.5m ÷ (RON99m - RON22m) (Based on the trailing twelve months to June 2024).
Therefore, SC IAMU has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.8%.
See our latest analysis for SC IAMU
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating SC IAMU's past further, check out this free graph covering SC IAMU's past earnings, revenue and cash flow.
What Does the ROCE Trend For SC IAMU Tell Us?
In terms of SC IAMU's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.2% from 9.6% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
In Conclusion...
We're a bit apprehensive about SC IAMU because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And long term shareholders have watched their investments stay flat over the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing: We've identified 5 warning signs with SC IAMU (at least 3 which shouldn't be ignored) , and understanding them would certainly be useful.
While SC IAMU 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. 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.
About BVB:IAMU
Moderate with mediocre balance sheet.