In This Article:
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Speaking of which, we noticed some great changes in Smart Parking's (ASX:SPZ) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Smart Parking is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = AU$6.2m ÷ (AU$56m - AU$17m) (Based on the trailing twelve months to June 2023).
Thus, Smart Parking has an ROCE of 16%. By itself that's a normal return on capital and it's in line with the industry's average returns of 16%.
Check out our latest analysis for Smart Parking
In the above chart we have measured Smart Parking's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Investors would be pleased with what's happening at Smart Parking. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 63% more capital is being employed now too. So we're very much inspired by what we're seeing at Smart Parking thanks to its ability to profitably reinvest capital.
The Bottom Line On Smart Parking's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Smart Parking has. Since the stock has returned a solid 100% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Smart Parking can keep these trends up, it could have a bright future ahead.
One final note, you should learn about the 2 warning signs we've spotted with Smart Parking (including 1 which is potentially serious) .