If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at the ROCE trend of Sun International (JSE:SUI) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Sun International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = R2.6b ÷ (R14b - R4.6b) (Based on the trailing twelve months to June 2024).
So, Sun International has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 22% earned by companies in a similar industry.
View our latest analysis for Sun International
In the above chart we have measured Sun International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sun International .
What The Trend Of ROCE Can Tell Us
You'd find it hard not to be impressed with the ROCE trend at Sun International. The data shows that returns on capital have increased by 57% over the trailing five years. The company is now earning R0.3 per dollar of capital employed. In regards to capital employed, Sun International appears to been achieving more with less, since the business is using 36% less capital to run its operation. Sun International may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
Our Take On Sun International's ROCE
In a nutshell, we're pleased to see that Sun International has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 62% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing, we've spotted 3 warning signs facing Sun International that you might find interesting.