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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in SigmaRoc's (LON:SRC) returns on capital, so let's have a look.
Understanding 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. The formula for this calculation on SigmaRoc is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = UK£83m ÷ (UK£2.1b - UK£376m) (Based on the trailing twelve months to December 2024).
Therefore, SigmaRoc has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 6.7%.
Check out our latest analysis for SigmaRoc
In the above chart we have measured SigmaRoc'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 SigmaRoc for free.
What Can We Tell From SigmaRoc's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 4.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 972% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From SigmaRoc's ROCE
All in all, it's terrific to see that SigmaRoc is reaping the rewards from prior investments and is growing its capital base. And a remarkable 185% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
SigmaRoc does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.