Finding a business with significant growth potential isn’t easy, but it’s possible if you focus on a few key financial metrics. Typically, you want to focus on growth trends. return Increase in capital employed (ROCE) and expand accordingly base of capital employed. Simply put, this type of business is a compound interest machine, meaning you are continually reinvesting your earnings at an ever-higher rate of return. With that in mind, the trends we see are: SFD (WSE:SFD) looks very promising, so let’s take a look.
What is return on capital employed (ROCE)?
For those who aren’t sure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. The formula for this calculation in SFD is:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.21 = 11m ÷ (90m – 39m) (Based on the previous 12 months to September 2023).
therefore, SFD’s ROCE is 21%. That’s an impressive return, and not only that, but it’s also higher than the average return of 15% for companies in similar industries.
Check out our latest analysis for SFD.
Although the past does not represent the future, it can be helpful to know how a company has performed historically. That’s why I created this graph above. Click here to learn more about past earnings. free A graph detailing SFD’s earnings and cash flow performance.
What does SFD’s ROCE trend indicate?
SFD has recently returned to profitability, and it appears that previous investments are paying off. The business was in the red five years ago, but is now generating 21% of its capital, so shareholders will no doubt be happy with this. Not only that, the company is leveraging his 237% more capital than before, which is not surprising for a company trying to ensure profitability. This indicates that the company has plenty of reinvestment opportunities that can generate higher returns.
On a related note, the company’s current liability to total assets ratio has decreased to 44%, which basically means that funding from short-term creditors and suppliers has decreased. So shareholders will be pleased to see that earnings growth is mainly driven by underlying performance. However, note that this may come with some risk, as current liabilities are still at fairly high levels.
What we can learn from SFD’s ROCE
In summary, it’s great to see that SFD has managed to return to profitability and continue to reinvest in its business. Investors seem to be aware of these changes, as the company’s stock has returned an impressive 403% to shareholders over the past five years. So we think it’s worth taking the time to see if these trends continue.
On another note, we discovered that 4 warning signs for SFD You probably want to know.
SFD is not the only stock that has earned high returns.If you want to know more, check here free A list of companies that achieve high return on equity due to solid fundamentals.
Valuation is complex, but we help make it simple.
Check out our comprehensive analysis, including below, to see if SFD is potentially overvalued or undervalued. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.
See free analysis
Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
