Returns On Capital Are Showing Encouraging Signs At Sasol (JSE:SOL)

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. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sasol is:

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

0.15 = R50b ÷ (R420b - R92b) (Based on the trailing twelve months to June 2022).

Thus, Sasol has an ROCE of 15%. In isolation, that's a pretty standard return but against the Chemicals industry average of 19%, it's not as good.

View our latest analysis for Sasol

In the above chart we have measured Sasol'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 Sasol here for free.

So How Is Sasol's ROCE Trending?

Sasol is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 60% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

To bring it all together, Sasol has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 29% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

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

While Sasol 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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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.