U.S. markets closed
  • S&P Futures

    3,631.25
    -29.75 (-0.81%)
     
  • Dow Futures

    28,997.00
    -206.00 (-0.71%)
     
  • Nasdaq Futures

    11,220.25
    -113.50 (-1.00%)
     
  • Russell 2000 Futures

    1,653.60
    -14.80 (-0.89%)
     
  • Crude Oil

    77.22
    -1.28 (-1.63%)
     
  • Gold

    1,631.60
    -4.60 (-0.28%)
     
  • Silver

    18.15
    -0.19 (-1.02%)
     
  • EUR/USD

    0.9562
    -0.0036 (-0.37%)
     
  • 10-Yr Bond

    3.9640
    +0.0860 (+2.22%)
     
  • Vix

    32.60
    +0.34 (+1.05%)
     
  • GBP/USD

    1.0653
    -0.0078 (-0.73%)
     
  • USD/JPY

    144.6260
    -0.1650 (-0.11%)
     
  • BTC-USD

    18,670.31
    -1,301.48 (-6.52%)
     
  • CMC Crypto 200

    427.73
    -31.41 (-6.84%)
     
  • FTSE 100

    6,984.59
    -36.36 (-0.52%)
     
  • Nikkei 225

    25,984.51
    -587.36 (-2.21%)
     

SDI (ASX:SDI) Has More To Do To Multiply In Value Going Forward

·3 min read

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of SDI (ASX:SDI) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

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 SDI, this is the formula:

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

0.11 = AU$9.5m ÷ (AU$102m - AU$15m) (Based on the trailing twelve months to June 2022).

Thus, SDI has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.8% generated by the Medical Equipment industry.

See our latest analysis for SDI

roce
roce

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 SDI has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 22% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that SDI has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

To sum it up, SDI has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 3 warning signs with SDI and understanding them should be part of your investment process.

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.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here