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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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Savor (NZSE:SVR) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on Savor is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = NZ$6.3m ÷ (NZ$54m - NZ$20m) (Based on the trailing twelve months to March 2024).
So, Savor has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 6.7% it's much better.
Check out our latest analysis for Savor
Historical performance is a great place to start when researching a stock so above you can see the gauge for Savor's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Savor.
The Trend Of ROCE
Savor has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 19% which is a sight for sore eyes. Not only that, but the company is utilizing 320% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In Conclusion...
Long story short, we're delighted to see that Savor's reinvestment activities have paid off and the company is now profitable. And since the stock has dived 81% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
Savor does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is a bit concerning...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.