To find multi-bagger stock, what are the underlying trends we need to look for in a business? Among other things, we’ll want to see two things; first, a growth to recover on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we considered Sidma steel products (ATH: SIDMA), it didn’t seem to tick all of those boxes.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Sidma Steel Products:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.19 = € 16m ÷ (€ 176m – € 89m) (Based on the last twelve months up to June 2021).
Thereby, Sidma Steel Products has a ROCE of 19%. In absolute terms, this is a satisfactory performance, but compared to the metals and mining industry average of 4.5%, it is much better.
Check out our latest review for Sidma steel products
Historical performance is a great place to start when looking for a title. So you can see above the gauge of the ROCE of Sidma Steel Products compared to its past yields. If you want to dive into Sidma Steel Products’ historic earnings, revenue and cash flow, check out these free graphics here.
What the ROCE trend can tell us
Things have been fairly stable at Sidma Steel Products, with her capital employed and returns on that capital remaining roughly the same for the last time. Companies with these characteristics tend to be mature and stable operations as they are past the growth phase. With that in mind, unless investments pick up in the future, we don’t expect Sidma Steel Products to be a multiple bagger in the future.
Besides, Sidma Steel Products’ current liabilities are still quite high at 51% of total assets. This can lead to certain risks as the business is essentially operating with quite a lot of dependence on its suppliers or other types of short-term creditors. Ideally, we would like this to decrease as that would mean less risky bonds.
In a nutshell, Sidma Steel Products has been operating with the same returns for the same amount of capital over the past few years. Yet to long-term shareholders, the stock has offered them an astounding 1,218% return over the past five years, so the market seems bullish on its future. But if the trajectory of those underlying trends continues, we think the likelihood of it being multi-bagging from here is not high.
If you want to know some of the risks facing Sidma Steel Products, we have found 5 warning signs (2 are of concern!) That you should know before investing here.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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