There's Been No Shortage Of Growth Recently For SIG's (LON:SHI) Returns On Capital

Yahoo

16-04-2025

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in SIG's (LON:SHI) returns on capital, so let's have a look.
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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 SIG is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = UK£21m ÷ (UK£1.2b - UK£439m) (Based on the trailing twelve months to December 2024).
So, SIG has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 14%.
See our latest analysis for SIG
Above you can see how the current ROCE for SIG 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 analyst report for SIG .
The fact that SIG is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, SIG is utilizing 31% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, SIG has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
Long story short, we're delighted to see that SIG's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 28% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
While SIG looks impressive, no company is worth an infinite price. The intrinsic value infographic for SHI helps visualize whether it is currently trading for a fair price.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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