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There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Sanderson Design Group (LON:SDG), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sanderson Design Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = UK£4.7m ÷ (UK£116m - UK£17m) (Based on the trailing twelve months to July 2024).
Therefore, Sanderson Design Group has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.2%.
See our latest analysis for Sanderson Design Group
In the above chart we have measured Sanderson Design Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sanderson Design Group .
What Can We Tell From Sanderson Design Group's ROCE Trend?
On the surface, the trend of ROCE at Sanderson Design Group doesn't inspire confidence. To be more specific, ROCE has fallen from 6.5% over the last five years. However it looks like Sanderson Design Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, Sanderson Design Group has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On Sanderson Design Group's ROCE
In summary, Sanderson Design Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 29% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.