Yahoo Finance We Think Smart Parking (ASX:SPZ) Might Have The DNA 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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Smart Parking's (ASX:SPZ) returns on capital, so let's have a look.
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 Smart Parking is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = AU$8.1m ÷ (AU$57m - AU$16m) (Based on the trailing twelve months to December 2023).
So, Smart Parking has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Commercial Services industry average of 12%.
Check out our latest analysis for Smart Parking
In the above chart we have measured Smart Parking's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Smart Parking for free.
What Does the ROCE Trend For Smart Parking Tell Us?
Smart Parking has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 20% on its capital. Not only that, but the company is utilizing 71% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On Smart Parking's ROCE
In summary, it's great to see that Smart Parking has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 246% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 2 warning signs for Smart Parking you'll probably want to know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
