What are the early trends to look for to identify a stock that could multiply in value over the long term? Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the quantity capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. That said, at a first glance at Sdiptech (STO:SDIP B) we’re not jumping off our chairs on the yield trend, but taking a closer look.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Sdiptech:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.087 = 364 million kr ÷ (4.9 billion kr – 751 million kr) (Based on the last twelve months to September 2021).
Therefore, Sdiptech has a ROCE of 8.7%. By itself, that’s a low return on capital, but it’s in line with industry average returns of 9.2%.
See our latest analysis for Sdiptech
Above, you can see how Sdiptech’s current ROCE compares to its past returns on capital, but there’s little you can say about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
The ROCE trend
As for Sdiptech’s historic ROCE trend, it doesn’t really demand attention. The company has employed 417% more capital over the past five years, and the return on that capital has remained stable at 8.7%. Since the company has increased the amount of capital employed, it appears that the investments that have been made simply do not provide a high return on capital.
The essentials of Sdiptech’s ROCE
As we saw above, Sdiptech’s returns on capital have not increased but it is reinvesting in the business. Investors must think there are better things to come because the stock knocked it out of the park, delivering a 926% gain to shareholders who have held it over the past three years. But if the trajectory of these underlying trends continues, we think the likelihood of it being a multi-bagger from here is not high.
If you want to know more about Sdiptech, we spotted 2 warning signs, and 1 of them is potentially serious.
Although Sdiptech does not generate the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.