If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Sphera Franchise Group (BVB:SFG), we don’t think it’s current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sphera Franchise Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.059 = RON26m ÷ (RON655m – RON217m) (Based on the trailing twelve months to September 2020).
Therefore, Sphera Franchise Group has an ROCE of 5.9%. On its own, that’s a low figure but it’s around the 6.6% average generated by the Hospitality industry.
See our latest analysis for Sphera Franchise Group
Above you can see how the current ROCE for Sphera Franchise Group 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.
How Are Returns Trending?
In terms of Sphera Franchise Group’s historical ROCE movements, the trend isn’t fantastic. Around three years ago the returns on capital were 39%, but since then they’ve fallen to 5.9%. And considering revenue has dropped while employing more capital, we’d be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it’s actually producing a lower return – “less bang for their buck” per se.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Sphera Franchise Group have fallen, meanwhile the business is employing more capital than it was three years ago. It should come as no surprise then that the stock has fallen 44% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.
If you want to know some of the risks facing Sphera Franchise Group we’ve found 3 warning signs (1 can’t be ignored!) that you should be aware of before investing here.
While Sphera Franchise Group isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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