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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Superior Group of Companies (NASDAQ:SGC), we weren't too upbeat about how things were going.
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. The formula for this calculation on Superior Group of Companies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = US$21m ÷ (US$400m - US$93m) (Based on the trailing twelve months to June 2024).
Therefore, Superior Group of Companies has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.
Check out our latest analysis for Superior Group of Companies
In the above chart we have measured Superior Group of Companies' 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 analyst report for Superior Group of Companies .
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Superior Group of Companies. About five years ago, returns on capital were 9.2%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Superior Group of Companies to turn into a multi-bagger.
Our Take On Superior Group of Companies' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 19% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing, we've spotted 1 warning sign facing Superior Group of Companies that you might find interesting.