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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating SG Fleet Group (ASX:SGF), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on SG Fleet Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = AU$109m ÷ (AU$2.7b - AU$193m) (Based on the trailing twelve months to December 2021).
Therefore, SG Fleet Group has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 6.0%.
View 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 here for free.
What Can We Tell From SG Fleet Group's ROCE Trend?
On the surface, the trend of ROCE at SG Fleet Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.3% from 15% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On SG Fleet Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that SG Fleet Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 11% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
SG Fleet Group does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.
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.