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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Sanderson Design Group's (LON:SDG) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Sanderson Design Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = UK£9.7m ÷ (UK£111m - UK£18m) (Based on the trailing twelve months to January 2024).
Thus, Sanderson Design Group has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.2% generated by the Consumer Durables industry.
Check out 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 The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Sanderson Design Group. The data shows that returns on capital have increased substantially over the last five years to 10%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. So we're very much inspired by what we're seeing at Sanderson Design Group thanks to its ability to profitably reinvest capital.
What We Can Learn From Sanderson Design Group's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Sanderson Design Group has. Since the stock has only returned 4.8% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Sanderson Design Group does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...