There Are Reasons To Feel Uneasy About System1 Group's (LON:SYS1) 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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at System1 Group (LON:SYS1), it didn't seem to tick all of these boxes.
Understanding 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. Analysts use this formula to calculate it for System1 Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = UK£855k ÷ (UK£15m - UK£5.7m) (Based on the trailing twelve months to March 2023).
Therefore, System1 Group has an ROCE of 9.2%. On its own, that's a low figure but it's around the 11% average generated by the Media industry.
Check out our latest analysis for System1 Group
In the above chart we have measured System1 Group's 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 System1 Group.
So How Is System1 Group's ROCE Trending?
When we looked at the ROCE trend at System1 Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 26% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On System1 Group's ROCE
Bringing it all together, while we're somewhat encouraged by System1 Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
One more thing, we've spotted 2 warning signs facing System1 Group that you might find interesting.
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.
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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.
