Here's What's Concerning About SOCEP's (BVB:SOCP) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at SOCEP (BVB:SOCP) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on SOCEP is:

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

0.03 = RON12m ÷ (RON429m - RON19m) (Based on the trailing twelve months to September 2021).

So, SOCEP has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 8.2%.

See our latest analysis for SOCEP

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

How Are Returns Trending?

On the surface, the trend of ROCE at SOCEP doesn't inspire confidence. Around five years ago the returns on capital were 8.4%, but since then they've fallen to 3.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On SOCEP's ROCE

To conclude, we've found that SOCEP is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 67% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

SOCEP does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.