Yahoo Finance Saunders International (ASX:SND) Could Become A Multi-Bagger
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, the ROCE of Saunders International (ASX:SND) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Saunders International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = AU$8.6m ÷ (AU$91m - AU$56m) (Based on the trailing twelve months to June 2022).
Thus, Saunders International has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Construction industry average of 14%.
See our latest analysis for Saunders International
Above you can see how the current ROCE for Saunders International 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 Saunders International here for free.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Saunders International. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. The amount of capital employed has increased too, by 73%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 61% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
In Conclusion...
To sum it up, Saunders International has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 105% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you'd like to know about the risks facing Saunders International, we've discovered 3 warning signs that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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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