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SAF-Holland (ETR:SFQ) Might Have The Makings Of A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in SAF-Holland's (ETR:SFQ) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for SAF-Holland, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = €184m ÷ (€1.7b - €374m) (Based on the trailing twelve months to March 2024).

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Therefore, SAF-Holland has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Auto Components industry.

See our latest analysis for SAF-Holland

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Above you can see how the current ROCE for SAF-Holland compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SAF-Holland for free.

The Trend Of ROCE

The trends we've noticed at SAF-Holland are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 57% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On SAF-Holland's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what SAF-Holland has. Since the stock has returned a staggering 101% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if SAF-Holland can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 2 warning signs facing SAF-Holland that you might find interesting.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.