If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Steinhoff International Holdings (JSE:SNH), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Steinhoff International Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = €474m ÷ (€13b - €4.6b) (Based on the trailing twelve months to September 2020).
So, Steinhoff International Holdings has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 10%.
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 Steinhoff International Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Steinhoff International Holdings Tell Us?
We're a bit concerned with the trends, because the business is applying 53% less capital than it was five years ago and returns on that capital have stayed flat. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 5.6%, it's hard to get excited about these developments.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 35% of total assets, this reported ROCE would probably be less than5.6% because total capital employed would be higher.The 5.6% ROCE could be even lower if current liabilities weren't 35% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
Our Take On Steinhoff International Holdings' ROCE
Overall, we're not ecstatic to see Steinhoff International Holdings reducing the amount of capital it employs in the business. Moreover, since the stock has crumbled 98% over the last five years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Steinhoff International Holdings has the makings of a multi-bagger.
If you want to know some of the risks facing Steinhoff International Holdings we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.
While Steinhoff International Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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