In This Article:
If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in Scully Royalty's (NYSE:SRL) returns on capital, so let's have a look.
Understanding 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. Analysts use this formula to calculate it for Scully Royalty:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0062 = CA$2.7m ÷ (CA$452m - CA$21m) (Based on the trailing twelve months to December 2023).
So, Scully Royalty has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.8%.
Check out our latest analysis for Scully Royalty
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 Scully Royalty has performed in the past in other metrics, you can view this free graph of Scully Royalty's past earnings, revenue and cash flow.
So How Is Scully Royalty's ROCE Trending?
Scully Royalty has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.6%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line
To bring it all together, Scully Royalty has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 35% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.