Yahoo Finance Why The 20% Return On Capital At Skellerup Holdings (NZSE:SKL) Should Have Your Attention
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Skellerup Holdings' (NZSE:SKL) look very promising so lets take a look.
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. Analysts use this formula to calculate it for Skellerup Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = NZ$49m ÷ (NZ$282m - NZ$42m) (Based on the trailing twelve months to December 2020).
So, Skellerup Holdings has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Machinery industry average of 12%.
Check out our latest analysis for Skellerup Holdings
Above you can see how the current ROCE for Skellerup Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Skellerup Holdings' ROCE Trend?
Skellerup Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 20%. The amount of capital employed has increased too, by 30%. So we're very much inspired by what we're seeing at Skellerup Holdings thanks to its ability to profitably reinvest capital.
The Bottom Line
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. Since the stock has returned a staggering 401% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a separate note, we've found 2 warning signs for Skellerup Holdings you'll probably want to know about.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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