Returns On Capital Are Showing Encouraging Signs At SIFCO Industries (NYSEMKT:SIF)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at SIFCO Industries (NYSEMKT:SIF) so let's look a bit deeper.

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. To calculate this metric for SIFCO Industries, this is the formula:

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

0.033 = US$2.6m ÷ (US$120m - US$40m) (Based on the trailing twelve months to December 2020).

Therefore, SIFCO Industries has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 8.5%.

See our latest analysis for SIFCO Industries

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'd like to look at how SIFCO Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is SIFCO Industries' ROCE Trending?

Like most people, we're pleased that SIFCO Industries is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 3.3% which is no doubt a relief for some early shareholders. In regards to capital employed, SIFCO Industries is using 29% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

What We Can Learn From SIFCO Industries' ROCE

From what we've seen above, SIFCO Industries has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 63% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 4 warning signs we've spotted with SIFCO Industries (including 2 which make us uncomfortable) .

While SIFCO Industries 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. 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.
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