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There Are Reasons To Feel Uneasy About Superior Group of Companies' (NASDAQ:SGC) Returns On Capital

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·3 min read
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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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Superior Group of Companies (NASDAQ:SGC), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Superior Group of Companies:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.092 = US$35m ÷ (US$485m - US$106m) (Based on the trailing twelve months to March 2022).

Thus, Superior Group of Companies has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the Luxury industry average of 15%.

Check out our latest analysis for Superior Group of Companies

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In the above chart we have measured Superior Group of Companies' 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 Superior Group of Companies.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Superior Group of Companies, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 9.2%. However it looks like Superior Group of Companies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Superior Group of Companies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Superior Group of Companies has the makings of a multi-bagger.

One more thing: We've identified 5 warning signs with Superior Group of Companies (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While Superior Group of Companies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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