What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at Surteco Group (ETR:SUR) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Surteco Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = €54m ÷ (€889m - €162m) (Based on the trailing twelve months to September 2022).
Thus, Surteco Group has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 8.3%.
Check out our latest analysis for Surteco Group
In the above chart we have measured Surteco Group's 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 Surteco Group here for free.
What Does the ROCE Trend For Surteco Group Tell Us?
The returns on capital haven't changed much for Surteco Group in recent years. Over the past five years, ROCE has remained relatively flat at around 7.4% and the business has deployed 41% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
On a side note, Surteco Group has done well to reduce current liabilities to 18% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Key Takeaway
As we've seen above, Surteco Group's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 16% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you'd like to know more about Surteco Group, we've spotted 3 warning signs, and 1 of them is significant.