Returns On Capital - An Important Metric For SIFCO Industries (NYSEMKT:SIF)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So on that note, SIFCO Industries (NYSEMKT:SIF) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for SIFCO Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = US$1.8m ÷ (US$122m - US$43m) (Based on the trailing twelve months to September 2020).
Therefore, SIFCO Industries has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.8%.
View our latest analysis for SIFCO Industries
Historical performance is a great place to start when researching a stock so above you can see the gauge for SIFCO Industries' ROCE against it's prior returns. If you're interested in investigating SIFCO Industries' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We're delighted to see that SIFCO Industries is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 2.3% which is no doubt a relief for some early shareholders. In regards to capital employed, SIFCO Industries is using 36% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 36% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Bottom Line On SIFCO Industries' ROCE
In the end, SIFCO Industries has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 44% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing: We've identified 5 warning signs with SIFCO Industries (at least 2 which shouldn't be ignored) , and understanding these would certainly be useful.
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.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
