If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Snap One Holdings’ (NASDAQ:SNPO) returns on capital, so let’s have a look.
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 Snap One Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.018 = US$26m ÷ (US$1.7b – US$191m) (Based on the trailing twelve months to September 2022).
Thus, Snap One Holdings has an ROCE of 1.8%. In absolute terms, that’s a low return and it also under-performs the Consumer Durables industry average of 17%.
Check out our latest analysis for Snap One Holdings
Above you can see how the current ROCE for Snap One Holdings compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Snap One Holdings’ ROCE Trending?
While there are companies with higher returns on capital out there, we still find the trend at Snap One Holdings promising. More specifically, while the company has kept capital employed relatively flat over the last two years, the ROCE has climbed 81% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
Our Take On Snap One Holdings’ ROCE
To sum it up, Snap One Holdings is collecting higher returns from the same amount of capital, and that’s impressive. And since the stock has fallen 53% over the last year, there might be an opportunity here. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
If you’d like to know about the risks facing Snap One Holdings, we’ve discovered 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
What are the risks and opportunities for Snap One Holdings?
Trading at 24.3% below our estimate of its fair value
Revenue grew by 17.2% over the past year
Has less than 1 year of cash runway
Currently unprofitable and not forecast to become profitable over the next 3 years
View all Risks and Rewards
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.