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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 briefly looking over the numbers, we don't think Sutton Harbour Group (LON:SUH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sutton Harbour Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.014 = UK£1.2m ÷ (UK£99m - UK£14m) (Based on the trailing twelve months to September 2023).
Therefore, Sutton Harbour Group has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 10%.
Check out our latest analysis for Sutton Harbour Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Sutton Harbour Group's past further, check out this free graph covering Sutton Harbour Group's past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Sutton Harbour Group's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 1.4% and the business has deployed 27% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 14% of total assets, this reported ROCE would probably be less than1.4% because total capital employed would be higher.The 1.4% ROCE could be even lower if current liabilities weren't 14% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.