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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 on that note, S4 Capital (LON:SFOR) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on S4 Capital is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = UK£22m ÷ (UK£1.2b - UK£292m) (Based on the trailing twelve months to December 2020).
Therefore, S4 Capital has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Media industry average of 8.9%.
Above you can see how the current ROCE for S4 Capital 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 S4 Capital here for free.
What Does the ROCE Trend For S4 Capital Tell Us?
The fact that S4 Capital is now generating some pre-tax profits from its prior investments is very encouraging. About two years ago the company was generating losses but things have turned around because it's now earning 2.6% on its capital. And unsurprisingly, like most companies trying to break into the black, S4 Capital is utilizing 101% more capital than it was two years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
What We Can Learn From S4 Capital's ROCE
In summary, it's great to see that S4 Capital has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if S4 Capital can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 2 warning signs with S4 Capital and understanding these should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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