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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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think SSP Group (LON:SSPG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 SSP Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£208m ÷ (UK£2.9b - UK£1.1b) (Based on the trailing twelve months to March 2024).
Therefore, SSP Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 7.9% it's much better.
Check out our latest analysis for SSP Group
Above you can see how the current ROCE for SSP Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for SSP Group .
So How Is SSP Group's ROCE Trending?
On the surface, the trend of ROCE at SSP Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 20% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SSP Group. And there could be an opportunity here if other metrics look good too, because the stock has declined 70% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
SSP Group does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...