Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Sun International (JSE:SUI) we really liked what we saw.
What Is 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. To calculate this metric for Sun International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = R2.6b ÷ (R13b - R3.7b) (Based on the trailing twelve months to June 2023).
So, Sun International has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 21%.
See our latest analysis for Sun International
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Sun International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Sun International's ROCE Trend?
Sun International has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 160% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Sun International appears to been achieving more with less, since the business is using 51% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
What We Can Learn From Sun International's ROCE
From what we've seen above, Sun International has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 12% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.