There's Been No Shortage Of Growth Recently For Sasol's (JSE:SOL) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Sasol (JSE:SOL) looks quite promising in regards to its trends of return on capital.

Our free stock report includes 2 warning signs investors should be aware of before investing in Sasol. Read for free now.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Sasol:

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

0.13 = R40b ÷ (R368b - R65b) (Based on the trailing twelve months to December 2024).

Thus, Sasol has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Chemicals industry average it falls behind.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Sasol .

What Does the ROCE Trend For Sasol Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Sasol. The figures show that over the last five years, returns on capital have grown by 193%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Sasol appears to been achieving more with less, since the business is using 29% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

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. Considering the stock has delivered 12% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Sasol does have some risks though, and we've spotted 2 warning signs for Sasol that you might be interested in.

While Sasol 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.