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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 S4 Capital (LON:SFOR) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for S4 Capital:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = UK£41m ÷ (UK£1.7b - UK£399m) (Based on the trailing twelve months to June 2024).
Thus, S4 Capital has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Media industry average of 11%.
See our latest analysis for S4 Capital
Above you can see how the current ROCE for S4 Capital compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for S4 Capital .
So How Is S4 Capital's ROCE Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 3.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 146%. So we're very much inspired by what we're seeing at S4 Capital thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that S4 Capital is reaping the rewards from prior investments and is growing its capital base. Although the company may be facing some issues elsewhere since the stock has plunged 83% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.
On a final note, we've found 3 warning signs for S4 Capital that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.