Returns On Capital Are Showing Encouraging Signs At Smith-Midland (NASDAQ:SMID)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. With that in mind, we've noticed some promising trends at Smith-Midland (NASDAQ:SMID) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Smith-Midland:

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

0.097 = US$3.6m ÷ (US$46m - US$9.5m) (Based on the trailing twelve months to September 2020).

So, Smith-Midland has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 11%.

Check out our latest analysis for Smith-Midland

Historical performance is a great place to start when researching a stock so above you can see the gauge for Smith-Midland's ROCE against it's prior returns. If you're interested in investigating Smith-Midland's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 160% more capital is being employed now too. So we're very much inspired by what we're seeing at Smith-Midland thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Smith-Midland has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Smith-Midland does have some risks though, and we've spotted 1 warning sign for Smith-Midland that you might be interested in.

While Smith-Midland 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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