Somec (BIT:SOM) hopes to turn its returns into capital

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. However, after briefly looking at the numbers, we don’t think Some c (BIT:SOM) has the makings of a multi-bagger in the future, but let’s see why it might be.

Return on capital employed (ROCE): what is it?

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. To calculate this metric for Somec, here is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.053 = €6.8m ÷ (€266m – €137m) (Based on the last twelve months to December 2021).

Thereby, Somec posted a ROCE of 5.3%. Ultimately, that’s a weak return, and it’s below the building industry average of 7.4%.

Discover our latest analysis for Somec

BIT:SOM Return on Capital Employed May 26, 2022

In the chart above, we measured Somec’s past ROCE against its past performance, but the future is arguably more important. If you want, you can check out analyst forecasts covering Somec here for free.

What can we say about Somec’s ROCE trend?

In terms of historical movements in Somec’s ROCE, the trend is not fantastic. To be more specific, ROCE has fallen by 13% over the past four years. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove successful, it can bode very well for long-term stock performance.

On a related note, Somec reduced its current liabilities to 52% of total assets. So we could tie some of that to the decline in ROCE. In effect, this means that their suppliers or short-term creditors finance the business less, which reduces certain elements of risk. Some would argue that this reduces the company’s effectiveness in generating a return on investment, as it now finances more operations with its own money. Keep in mind that 52% is still quite high, so these risks are still somewhat prevalent.

Our point of view on Somec’s ROCE

Even though capital returns have fallen in the short term, we find it promising that both revenue and capital employed have increased for Somec. And the stock has followed suit, returning 53% to shareholders over the past three years. So while the underlying trends can already be explained by investors, we still think this stock deserves further investigation.

On a separate note, we found 2 warning signs for Somec you will probably want to know more.

While Somec does not win the highest return, check out this free list of companies that achieve high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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