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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think SATS (SGX:S58) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
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 SATS is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = S$412m ÷ (S$8.3b - S$1.9b) (Based on the trailing twelve months to September 2024).
Therefore, SATS has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.3%.
View our latest analysis for SATS
In the above chart we have measured SATS' 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 SATS .
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at SATS doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.4% from 11% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that SATS is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 23% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
SATS does have some risks though, and we've spotted 1 warning sign for SATS that you might be interested in.