Sifi Cluj Retail (BVB:ARCU) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Sifi Cluj Retail (BVB:ARCU), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Sifi Cluj Retail, this is the formula:

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

0.056 = RON5.1m ÷ (RON111m - RON20m) (Based on the trailing twelve months to June 2024).

Thus, Sifi Cluj Retail has an ROCE of 5.6%. On its own that's a low return, but compared to the average of 3.5% generated by the Hospitality industry, it's much better.

See our latest analysis for Sifi Cluj Retail

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

What Does the ROCE Trend For Sifi Cluj Retail Tell Us?

In terms of Sifi Cluj Retail's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.8% over the last five years. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 18%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.6%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Sifi Cluj Retail's ROCE

While returns have fallen for Sifi Cluj Retail in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 10% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 4 warning signs with Sifi Cluj Retail (at least 1 which is significant) , and understanding these would certainly be useful.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.