S4 Capital (LON:SFOR) Might Have The Makings Of A Multi-Bagger
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at S4 Capital (LON:SFOR) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for S4 Capital, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = UK£43m ÷ (UK£1.9b - UK£642m) (Based on the trailing twelve months to December 2022).
Thus, S4 Capital has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Media industry average of 10%.
View our latest analysis for S4 Capital
In the above chart we have measured S4 Capital's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering S4 Capital here for free.
How Are Returns Trending?
S4 Capital has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 3.3% which is a sight for sore eyes. In addition to that, S4 Capital is employing 201% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
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 33% 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
To the delight of most shareholders, S4 Capital has now broken into profitability. And since the stock has dived 71% over the last three years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
On a final note, we've found 3 warning signs for S4 Capital that we think you should be aware of.
While S4 Capital isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
