Our Take On The Returns On Capital At Sea Harvest Group (JSE:SHG)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Sea Harvest Group (JSE:SHG) looks decent, right now, so lets see what the trend of returns can tell us.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sea Harvest Group, this is the formula:

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

0.12 = R575m ÷ (R5.7b - R987m) (Based on the trailing twelve months to June 2020).

Thus, Sea Harvest Group has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Food industry.

Check out our latest analysis for Sea Harvest Group

In the above chart we have measured Sea Harvest Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sea Harvest Group here for free.

What Can We Tell From Sea Harvest Group's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 539% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 17% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Sea Harvest Group's ROCE

In the end, Sea Harvest Group has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 31% to shareholders over the last three years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing, we've spotted 3 warning signs facing Sea Harvest Group that you might find interesting.

While Sea Harvest Group 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.

When trading Sea Harvest Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.