Here's What's Concerning About S.C. Serico's (BVB:SERC) Returns On 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at S.C. Serico (BVB:SERC) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on S.C. Serico is:

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

0.0059 = RON315k ÷ (RON54m - RON495k) (Based on the trailing twelve months to June 2024).

Thus, S.C. Serico has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.1%.

Check out our latest analysis for S.C. Serico

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 S.C. Serico's past further, check out this free graph covering S.C. Serico's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of S.C. Serico's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 1.5%, but since then they've fallen to 0.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line On S.C. Serico's ROCE

Bringing it all together, while we're somewhat encouraged by S.C. Serico's reinvestment in its own business, we're aware that returns are shrinking.

One final note, you should learn about the 4 warning signs we've spotted with S.C. Serico (including 3 which are potentially serious) .

While S.C. Serico 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.