Return Trends At Smith-Midland (NASDAQ:SMID) Aren't Appealing
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Smith-Midland's (NASDAQ:SMID) trend of ROCE, we liked what we saw.
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. To calculate this metric for Smith-Midland, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$7.5m ÷ (US$55m - US$13m) (Based on the trailing twelve months to September 2021).
Therefore, Smith-Midland has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 15% generated by the Basic Materials industry.
See our latest analysis for Smith-Midland
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Smith-Midland has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Smith-Midland's ROCE Trend?
While the current returns on capital are decent, they haven't changed much. The company has employed 139% more capital in the last five years, and the returns on that capital have remained stable at 18%. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On Smith-Midland's ROCE
In the end, Smith-Midland has proven its ability to adequately reinvest capital at good rates of return. On top of that, the stock has rewarded shareholders with a remarkable 289% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Smith-Midland does have some risks though, and we've spotted 2 warning signs for Smith-Midland that you might be interested in.
While Smith-Midland isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
