Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. In a perfect world, we would like to see a business invest more capital in their business, and ideally the returns from that capital increase as well. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. So when we ran our eyes Sykes Enterprises’ (NASDAQ: SYKE) ROCE trend, we liked what we saw.
What is Return on Capital Employed (ROCE)?
If you’ve never worked with ROCE before, it measures the “ return ” (profit before tax) that a business generates from the capital employed in its business. The formula for this calculation on Sykes Enterprises is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.12 = $ 133 million ÷ ($ 1.4 billion – $ 282 million) (Based on the last twelve months up to March 2021).
So, Sykes Enterprises has a ROCE of 12%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the IT industry average of 11%.
Check out our latest analysis for Sykes Enterprises
In the graph above, we measured Sykes Enterprises’ past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Sykes Enterprises.
What does the ROCE trend tell us for Sykes companies?
While the returns on capital are good, they haven’t budged much. The company has steadily gained 12% over the past five years, and the capital employed within the company has increased by 37% during this period. 12% is pretty standard return, and it’s reassuring to know that Sykes Enterprises has always earned that amount. Over long periods of time, returns like these may not be too exciting, but with consistency they can pay off in terms of stock price returns.
Our take on the ROCE of Sykes Enterprises
The main thing to remember is that Sykes Enterprises has proven its ability to continually reinvest at respectable rates of return. And given that the stock has only risen 38% in the past five years, we suspect the market is starting to recognize these trends. So, due to the trends we’re seeing, we recommend that you take a closer look at this stock to see if it has the makings of a multi-bagger.
Like most businesses, Sykes Enterprises comes with certain risks, and we have found 2 warning signs that you need to be aware of.
While Sykes Enterprises doesn’t get the best return, take a look at this free list of companies that achieve high returns on their equity with strong balance sheets.
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