Yahoo Finance The Returns On Capital At Somero Enterprises (LON:SOM) Don't Inspire Confidence
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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Somero Enterprises (LON:SOM), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Somero Enterprises:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.40 = US$34m ÷ (US$99m - US$14m) (Based on the trailing twelve months to December 2023).
Therefore, Somero Enterprises has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
See our latest analysis for Somero Enterprises
Above you can see how the current ROCE for Somero Enterprises compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Somero Enterprises .
How Are Returns Trending?
When we looked at the ROCE trend at Somero Enterprises, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 53%. However it looks like Somero Enterprises might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Somero Enterprises' ROCE
To conclude, we've found that Somero Enterprises is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 72% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Somero Enterprises does have some risks though, and we've spotted 1 warning sign for Somero Enterprises that you might be interested in.
Somero Enterprises is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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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