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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Sasol's (JSE:SOL) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Sasol is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = R45b ÷ (R365b - R54b) (Based on the trailing twelve months to June 2024).
Therefore, Sasol has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.
Check out our latest analysis for Sasol
Above you can see how the current ROCE for Sasol compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sasol .
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at Sasol. We found that the returns on capital employed over the last five years have risen by 109%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 26% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Sasol may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
Our Take On Sasol's ROCE
In a nutshell, we're pleased to see that Sasol has been able to generate higher returns from less capital. And since the stock has fallen 54% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you'd like to know about the risks facing Sasol, we've discovered 1 warning sign that you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About JSE:SOL
Sasol
Operates as a chemical and energy company in South Africa and internationally.
Reasonable growth potential and fair value.
