S.C. Severnav (BVB:SEVE) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at S.C. Severnav (BVB:SEVE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for S.C. Severnav:

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

0.033 = RON5.7m ÷ (RON244m - RON70m) (Based on the trailing twelve months to December 2023).

So, S.C. Severnav has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 5.8%.

View our latest analysis for S.C. Severnav

Historical performance is a great place to start when researching a stock so above you can see the gauge for S.C. Severnav's ROCE against it's prior returns. If you'd like to look at how S.C. Severnav has performed in the past in other metrics, you can view this free graph of S.C. Severnav's past earnings, revenue and cash flow.

What Does the ROCE Trend For S.C. Severnav Tell Us?

On the surface, the trend of ROCE at S.C. Severnav doesn't inspire confidence. Around five years ago the returns on capital were 4.2%, but since then they've fallen to 3.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

While returns have fallen for S.C. Severnav in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 4 warning signs with S.C. Severnav (at least 3 which are a bit concerning) , and understanding these would certainly be useful.

While S.C. Severnav isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.