Yahoo Finance Saunders International (ASX:SND) Is Very Good At Capital Allocation
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Saunders International (ASX:SND) looks great, so lets see what the trend can tell us.
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. To calculate this metric for Saunders International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.33 = AU$14m ÷ (AU$91m - AU$48m) (Based on the trailing twelve months to June 2023).
So, Saunders International has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Construction industry average of 13%.
See our latest analysis for Saunders International
In the above chart we have measured Saunders International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Saunders International.
So How Is Saunders International's ROCE Trending?
We're delighted to see that Saunders International is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 33% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Saunders International is utilizing 75% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 53% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
In Conclusion...
Long story short, we're delighted to see that Saunders International's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 208% 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 Saunders International can keep these trends up, it could have a bright future ahead.
If you want to continue researching Saunders International, you might be interested to know about the 2 warning signs that our analysis has discovered.
Saunders International 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.
