Sephaku Holdings (JSE:SEP) Will Be Hoping To Turn Its Returns On Capital Around

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Sephaku Holdings (JSE:SEP), we weren't too hopeful.

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 Sephaku Holdings, this is the formula:

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

0.024 = R31m ÷ (R1.4b - R112m) (Based on the trailing twelve months to September 2021).

So, Sephaku Holdings has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 16%.

View our latest analysis for Sephaku Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sephaku Holdings' ROCE against it's prior returns. If you're interested in investigating Sephaku Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Sephaku Holdings, given the returns are trending downwards. About five years ago, returns on capital were 6.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Sephaku Holdings to turn into a multi-bagger.

Our Take On Sephaku Holdings' ROCE

In summary, it's unfortunate that Sephaku Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 62% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 4 warning signs with Sephaku Holdings (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Sephaku 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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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.