Capital Allocation Trends At Sucro (CVE:SUGR) Aren't Ideal
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think Sucro (CVE:SUGR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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 Sucro, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
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0.17 = US$47m ÷ (US$604m - US$327m) (Based on the trailing twelve months to September 2024).
Therefore, Sucro has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 12% it's much better.
View our latest analysis for Sucro
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sucro.
The Trend Of ROCE
We weren't thrilled with the trend because Sucro's ROCE has reduced by 41% over the last two years, while the business employed 82% more capital. That being said, Sucro raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Sucro probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a separate but related note, it's important to know that Sucro has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Sucro's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sucro. And the stock has followed suit returning a meaningful 21% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.