Yahoo Finance SFL (NYSE:SFL) Might Have The Makings Of A Multi-Bagger
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, SFL (NYSE:SFL) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on SFL is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = US$248m ÷ (US$3.8b - US$784m) (Based on the trailing twelve months to March 2023).
Therefore, SFL has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 23%.
View our latest analysis for SFL
Above you can see how the current ROCE for SFL 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 SFL's ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 20%. So we're very much inspired by what we're seeing at SFL thanks to its ability to profitably reinvest capital.
In Conclusion...
To sum it up, SFL has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know more about SFL, we've spotted 4 warning signs, and 1 of them doesn't sit too well with us.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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