Yahoo Finance Investors Met With Slowing Returns on Capital At Socket Mobile (NASDAQ:SCKT)
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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Socket Mobile's (NASDAQ:SCKT) ROCE trend, we were pretty happy with what we saw.
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. Analysts use this formula to calculate it for Socket Mobile:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$2.9m ÷ (US$26m - US$4.7m) (Based on the trailing twelve months to March 2022).
Therefore, Socket Mobile has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Tech industry.
View our latest analysis for Socket Mobile
Historical performance is a great place to start when researching a stock so above you can see the gauge for Socket Mobile's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Socket Mobile, check out these free graphs here.
What Does the ROCE Trend For Socket Mobile Tell Us?
While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 20% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Socket Mobile 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.
Our Take On Socket Mobile's ROCE
In the end, Socket Mobile has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 28%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
Socket Mobile does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...
While Socket Mobile 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.
