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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at SDI Group (LON:SDI) 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)?
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. To calculate this metric for SDI Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = UK£6.3m ÷ (UK£79m - UK£11m) (Based on the trailing twelve months to October 2024).
So, SDI Group has an ROCE of 9.2%. On its own, that's a low figure but it's around the 11% average generated by the Electronic industry.
Check out our latest analysis for SDI Group
Above you can see how the current ROCE for SDI Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for SDI Group .
What Can We Tell From SDI Group's ROCE Trend?
On the surface, the trend of ROCE at SDI Group doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
In summary, SDI Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 18% in the last five years. Therefore based on the analysis done in this article, we don't think SDI Group has the makings of a multi-bagger.