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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Spark Infrastructure Group (ASX:SKI) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
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 Spark Infrastructure Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = AU$254m ÷ (AU$3.1b - AU$146m) (Based on the trailing twelve months to December 2020).
So, Spark Infrastructure Group has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Electric Utilities industry average of 5.7%.
Above you can see how the current ROCE for Spark Infrastructure Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Spark Infrastructure Group here for free.
What The Trend Of ROCE Can Tell Us
Spark Infrastructure Group has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 22% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Spark Infrastructure Group appears to been achieving more with less, since the business is using 20% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
From what we've seen above, Spark Infrastructure Group has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a solid 44% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we've found 3 warning signs for Spark Infrastructure Group that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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