Investors Should Be Encouraged By SPAR Group's (NASDAQ:SGRP) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. And in light of that, the trends we're seeing at SPAR Group's (NASDAQ:SGRP) look very promising so lets take a look.

Understanding 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 SPAR Group is:

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

0.27 = US$11m ÷ (US$92m - US$51m) (Based on the trailing twelve months to March 2021).

Thus, SPAR Group has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 9.7% earned by companies in a similar industry.

View our latest analysis for SPAR Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for SPAR Group's ROCE against it's prior returns. If you'd like to look at how SPAR Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From SPAR Group's ROCE Trend?

SPAR Group is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 27%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 47%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 55% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

In summary, it's great to see that SPAR Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 88% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 4 warning signs with SPAR Group and understanding them should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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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