Skellerup Holdings (NZSE:SKL) Is Very Good At Capital Allocation
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Skellerup Holdings (NZSE:SKL) looks great, so lets see what the trend 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. The formula for this calculation on Skellerup Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = NZ$67m ÷ (NZ$340m - NZ$43m) (Based on the trailing twelve months to December 2022).
Therefore, Skellerup Holdings has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Machinery industry average of 14%.
Check out our latest analysis for Skellerup Holdings
In the above chart we have measured Skellerup Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
The trends we've noticed at Skellerup Holdings are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. The amount of capital employed has increased too, by 40%. So we're very much inspired by what we're seeing at Skellerup Holdings thanks to its ability to profitably reinvest capital.
The Key Takeaway
In summary, it's great to see that Skellerup Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Skellerup Holdings can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 1 warning sign for Skellerup Holdings you'll probably want to know about.
Skellerup Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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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