Investors Could Be Concerned With SG Fleet Group's (ASX:SGF) Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at SG Fleet Group (ASX:SGF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for SG Fleet Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = AU$169m ÷ (AU$2.7b - AU$221m) (Based on the trailing twelve months to December 2022).
Therefore, SG Fleet Group has an ROCE of 6.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.
Check out our latest analysis for SG Fleet Group
Above you can see how the current ROCE for SG Fleet Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
In terms of SG Fleet Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.7% from 18% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On SG Fleet Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that SG Fleet Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 23% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
SG Fleet Group does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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