We're Watching These Trends At Santova (JSE:SNV)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Santova (JSE:SNV) and its ROCE trend, we weren't exactly thrilled.

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 Santova, this is the formula:

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

0.16 = R114m ÷ (R1.2b - R545m) (Based on the trailing twelve months to August 2020).

Therefore, Santova has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 6.0% it's much better.

Check out our latest analysis for Santova

Historical performance is a great place to start when researching a stock so above you can see the gauge for Santova's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Santova, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Santova, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 20% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Santova has done well to pay down its current liabilities to 44% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

While returns have fallen for Santova in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 24% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 2 warning signs for Santova you'll probably want to know about.

While Santova 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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