When evaluating a stock that has the potential to multiply in value over the long term, it is important to look for certain early trends. One key aspect to consider is whether a company is investing capital into its business and if the returns from that capital are increasing. This is known as compounding, where a company reinvests its profits into profitable initiatives. When we examine SFC Energy (ETR:F3C) and its Return On Capital Employed (ROCE) trend, we notice some concerns.
ROCE is a metric used to assess the percentage of pre-tax income a company earns on the capital invested in its business. In the case of SFC Energy, the ROCE is 6.1%, which is relatively low and underperforms the industry average of 13%. This suggests that the company is not generating significant returns on its invested capital compared to its peers.
Although the current ROCE for SFC Energy is lower than its past returns, it is important to consider the company’s growth in revenue and assets. Despite the decrease in returns, the company has experienced an increase in both revenue and capital employed. This suggests that SFC Energy is investing in growth, and while it may have led to a temporary reduction in ROCE, there is potential for long-term benefits if the increased capital generates additional returns.
It is worth noting that SFC Energy has successfully paid down its current liabilities, which now account for only 20% of total assets. While this may have contributed to the drop in ROCE, it also reduces the risk to the business as it relies less on short-term creditors. However, some argue that this reduced efficiency in generating ROCE, as the company is now funding more of its operations with its own money.
Overall, while the short-term returns on capital for SFC Energy may have fallen, the growth in revenue and capital employed should not be overlooked. The stock has also performed well over the last five years, delivering a 202% return. While there are risks associated with SFC Energy, it is certainly worth further investigation for long-term investors.
Sources: Simply Wall St