In This Article:
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Skellerup Holdings' (NZSE:SKL) ROCE trend, we were pretty happy with what we saw.
Understanding 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 Skellerup Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = NZ$40m ÷ (NZ$284m - NZ$37m) (Based on the trailing twelve months to June 2020).
So, Skellerup Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Machinery industry.
See our latest analysis for Skellerup Holdings
In the above chart we have measured Skellerup Holdings' 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 Skellerup Holdings here for free.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 41% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that Skellerup Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Skellerup Holdings' ROCE
In the end, Skellerup Holdings has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 211% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Skellerup Holdings does have some risks though, and we've spotted 2 warning signs for Skellerup Holdings that you might be interested in.