- United States
- Basic Materials
Returns On Capital At Smith-Midland (NASDAQ:SMID) Paint A Concerning Picture
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Smith-Midland (NASDAQ:SMID) and its ROCE trend, we weren't exactly thrilled.
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)
0.017 = US$749k ÷ (US$54m - US$11m) (Based on the trailing twelve months to September 2022).
Thus, Smith-Midland has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 12%.
Check out our latest analysis for Smith-Midland
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're interested in investigating Smith-Midland's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Smith-Midland Tell Us?
In terms of Smith-Midland's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 24%, but since then they've fallen to 1.7%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On Smith-Midland's ROCE
In summary, we're somewhat concerned by Smith-Midland's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 103%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One final note, you should learn about the 3 warning signs we've spotted with Smith-Midland (including 1 which shouldn't be ignored) .
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.
Smith-Midland Corporation, through its subsidiaries, invents, develops, manufactures, markets, leases, licenses, sells, and installs precast concrete products primarily for use in the construction, highway, utilities, and farming industries.
Excellent balance sheet with poor track record.