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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Santova (JSE:SNV) looks great, so lets see what the trend can tell us.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Santova:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = R310m ÷ (R1.7b - R780m) (Based on the trailing twelve months to August 2022).
Therefore, Santova has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Logistics industry average of 7.5%.
See our latest analysis for Santova
In the above chart we have measured Santova'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 report for Santova.
What The Trend Of ROCE Can Tell Us
Santova is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 35%. The amount of capital employed has increased too, by 111%. So we're very much inspired by what we're seeing at Santova thanks to its ability to profitably reinvest capital.
Another thing to note, Santova has a high ratio of current liabilities to total assets of 47%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Santova has. Since the stock has returned a staggering 144% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Santova can keep these trends up, it could have a bright future ahead.
Santova does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...