Seamless Distribution Systems (NGM:SDS) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Seamless Distribution Systems (NGM:SDS) and its ROCE trend, we weren't exactly thrilled.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Seamless Distribution Systems, this is the formula:

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

0.052 = kr17m ÷ (kr445m - kr111m) (Based on the trailing twelve months to March 2025).

Therefore, Seamless Distribution Systems has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Software industry average of 23%.

View our latest analysis for Seamless Distribution Systems

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

How Are Returns Trending?

On the surface, the trend of ROCE at Seamless Distribution Systems doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.2% from 15% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

On a side note, Seamless Distribution Systems has done well to pay down its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

To conclude, we've found that Seamless Distribution Systems is reinvesting in the business, but returns have been falling. Moreover, since the stock has crumbled 78% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Seamless Distribution Systems has the makings of a multi-bagger.

On a final note, we found 5 warning signs for Seamless Distribution Systems (3 don't sit too well with us) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.