To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Sureserve Group (LON:SUR) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
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 Sureserve Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = UK£13m ÷ (UK£123m - UK£53m) (Based on the trailing twelve months to September 2021).
Thus, Sureserve Group has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 11% it's much better.
Check out our latest analysis for Sureserve Group
Above you can see how the current ROCE for Sureserve Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sureserve Group here for free.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Sureserve Group is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 19% on its capital. While returns have increased, the amount of capital employed by Sureserve Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
On a separate but related note, it's important to know that Sureserve Group has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Sureserve Group's ROCE
To sum it up, Sureserve Group is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 136% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Sureserve Group can keep these trends up, it could have a bright future ahead.