South Ocean Holdings' (JSE:SOH) Returns On Capital Are Heading Higher

By
Simply Wall St
Published
March 23, 2021
JSE:SOH
Source: Shutterstock

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, South Ocean Holdings (JSE:SOH) looks quite promising in regards to its trends of return on capital.

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 South Ocean Holdings is:

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

0.062 = R35m ÷ (R694m - R137m) (Based on the trailing twelve months to December 2020).

Thus, South Ocean Holdings has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 17%.

Check out our latest analysis for South Ocean Holdings

roce
JSE:SOH Return on Capital Employed March 24th 2021

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

How Are Returns Trending?

We're delighted to see that South Ocean Holdings is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 6.2%, which is always encouraging. While returns have increased, the amount of capital employed by South Ocean Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On South Ocean Holdings' ROCE

In summary, we're delighted to see that South Ocean Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 91% 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.

On a final note, we found 3 warning signs for South Ocean Holdings (1 is a bit concerning) you should be aware of.

While South Ocean Holdings 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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