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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Sif Holding's (AMS:SIFG) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Sif Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = €14m ÷ (€600m - €155m) (Based on the trailing twelve months to December 2023).
Thus, Sif Holding has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 12%.
View our latest analysis for Sif Holding
In the above chart we have measured Sif Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sif Holding .
What The Trend Of ROCE Can Tell Us
We're delighted to see that Sif Holding is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 3.1% on its capital. Not only that, but the company is utilizing 417% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 26%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
What We Can Learn From Sif Holding's ROCE
In summary, it's great to see that Sif Holding has managed to break into profitability and is continuing to reinvest in its business. Considering the stock has delivered 12% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.