In This Article:
If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at STS Group (ETR:SF3) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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 STS Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = €8.8m ÷ (€265m - €156m) (Based on the trailing twelve months to June 2024).
So, STS Group has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Machinery industry average of 9.1%.
Check out our latest analysis for STS Group
In the above chart we have measured STS 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 STS Group for free.
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at STS Group. The figures show that over the last five years, returns on capital have grown by 169%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 21% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
On a side note, STS Group's current liabilities are still rather high at 59% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
In a nutshell, we're pleased to see that STS Group has been able to generate higher returns from less capital. And since the stock has fallen 36% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.