Yahoo Finance What Do The Returns On Capital At Sportscene Group (CVE:SPS.A) Tell Us?
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Sportscene Group (CVE:SPS.A) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Sportscene Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = CA$1.2m ÷ (CA$104m - CA$22m) (Based on the trailing twelve months to May 2020).
Thus, Sportscene Group has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 9.2%.
Check out our latest analysis for Sportscene Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Sportscene Group's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Sportscene Group. The company has consistently earned 1.5% for the last five years, and the capital employed within the business has risen 69% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Sportscene Group's ROCE
In summary, Sportscene Group has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 8.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you'd like to know more about Sportscene Group, we've spotted 4 warning signs, and 1 of them is significant.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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