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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at SG Fleet Group (ASX:SGF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 SG Fleet Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = AU$195m ÷ (AU$3.1b - AU$295m) (Based on the trailing twelve months to December 2023).
Thus, SG Fleet Group has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 11%.
See our latest analysis for SG Fleet Group
In the above chart we have measured SG Fleet Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SG Fleet Group for free.
What The Trend Of ROCE Can Tell Us
In terms of SG Fleet Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 7.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On SG Fleet Group's ROCE
Bringing it all together, while we're somewhat encouraged by SG Fleet Group's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 52% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One final note, you should learn about the 2 warning signs we've spotted with SG Fleet Group (including 1 which is significant) .