Securitas (STO:SECU B) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Securitas (STO:SECU B) 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)?

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 Securitas is:

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

0.11 = kr4.0b ÷ (kr63b - kr26b) (Based on the trailing twelve months to March 2021).

Therefore, Securitas has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.1% generated by the Commercial Services industry.

Check out our latest analysis for Securitas

Above you can see how the current ROCE for Securitas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Securitas.

What Can We Tell From Securitas' ROCE Trend?

When we looked at the ROCE trend at Securitas, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 11%. However it looks like Securitas might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, Securitas' current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Securitas' ROCE

Bringing it all together, while we're somewhat encouraged by Securitas' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 14% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Securitas, we've discovered 2 warning signs that you should be aware of.

While Securitas 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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