If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Sim Leisure Group (Catalist:URR) so let's look a bit deeper.
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. The formula for this calculation on Sim Leisure Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = RM15m ÷ (RM139m - RM22m) (Based on the trailing twelve months to June 2022).
Therefore, Sim Leisure Group has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 1.0% generated by the Hospitality industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sim Leisure Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sim Leisure Group, check out these free graphs here.
What Does the ROCE Trend For Sim Leisure Group Tell Us?
The trends we've noticed at Sim Leisure Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 252%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On Sim Leisure Group's ROCE
To sum it up, Sim Leisure Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 22% to shareholders over the last three years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
One final note, you should learn about the 4 warning signs we've spotted with Sim Leisure Group (including 2 which are a bit unpleasant) .
While Sim Leisure Group 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.
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