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There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Socovesa (SNSE:SOCOVESA), it didn’t seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Socovesa:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = CL$53b ÷ (CL$1.0t – CL$573b) (Based on the trailing twelve months to March 2022).
Therefore, Socovesa has an ROCE of 12%. That’s a pretty standard return and it’s in line with the industry average of 12%.
Check out our latest analysis for Socovesa
Historical performance is a great place to start when researching a stock so above you can see the gauge for Socovesa’s ROCE against it’s prior returns. If you’d like to look at how Socovesa has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at Socovesa doesn’t inspire confidence. Around five years ago the returns on capital were 19%, but since then they’ve fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a separate but related note, it’s important to know that Socovesa has a current liabilities to total assets ratio of 57%, 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. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Socovesa. And there could be an opportunity here if other metrics look good too, because the stock has declined 53% in the last five years. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.
If you’d like to know more about Socovesa, we’ve spotted 4 warning signs, and 3 of them can’t be ignored.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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