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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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Smarttech247 Group (LON:S247) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Smarttech247 Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = €195k ÷ (€15m - €3.5m) (Based on the trailing twelve months to January 2024).
So, Smarttech247 Group has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Software industry average of 9.9%.
See our latest analysis for Smarttech247 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'd like to look at how Smarttech247 Group has performed in the past in other metrics, you can view this free graph of Smarttech247 Group's past earnings, revenue and cash flow.
What Does the ROCE Trend For Smarttech247 Group Tell Us?
When we looked at the ROCE trend at Smarttech247 Group, we didn't gain much confidence. Around four years ago the returns on capital were 28%, but since then they've fallen to 1.7%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, Smarttech247 Group has decreased its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Smarttech247 Group. And there could be an opportunity here if other metrics look good too, because the stock has declined 51% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.