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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 Seven Principles (ETR:T3T1) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Seven Principles:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = €805k ÷ (€22m - €5.2m) (Based on the trailing twelve months to June 2024).
Therefore, Seven Principles has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 8.1%.
Check out our latest analysis for Seven Principles
Historical performance is a great place to start when researching a stock so above you can see the gauge for Seven Principles' ROCE against it's prior returns. If you'd like to look at how Seven Principles has performed in the past in other metrics, you can view this free graph of Seven Principles' past earnings, revenue and cash flow.
The Trend Of ROCE
We're delighted to see that Seven Principles is reaping rewards from its investments and has now broken into profitability. The company now earns 4.7% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.
On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Seven Principles has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
What We Can Learn From Seven Principles' ROCE
As discussed above, Seven Principles appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 53% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.