Investors encounter slowing returns on capital in Santova (JSE: SNV)

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends to watch out for. Among other things, we’ll want to see two things; first, a growth return on capital employed (ROCE) and on the other hand, an expansion of the company amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. That is why, when we briefly examined Santova (JSE: SNV) Trend ROCE, we were pretty happy with what we saw.

Return on capital employed (ROCE): what is it?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Santova:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.17 = R111m ÷ (R1.3b – R656m) (Based on the last twelve months up to February 2021).

Therefore, Santova has a ROCE of 17%. This in itself is a standard return, but it is much better than the 6.4% generated by the logistics industry.

Discover our latest analyzes for Santova

While the past is not representative of the future, it can be helpful to know how a business has behaved historically, which is why we have this graph above. If you want to dig deeper into Santova’s past, check out this free graph of past income, income and cash flow.

What can we say about Santova’s ROCE trend?

While the returns on capital are good, they haven’t budged much. The company has steadily gained 17% over the past five years, and the capital employed within the company has increased by 43% during this period. Given that 17% is moderate ROCE, it’s good to see that a company can keep reinvesting at these decent rates of return. Stable returns in this stage may be unattractive, but if they can be sustained over the long term, they often offer great rewards for shareholders.

Another thing to note, Santova has a current liabilities / total assets ratio of 50%. What this actually means is that suppliers (or short-term creditors) fund a large portion of the business, so just be aware that this can introduce some elements of risk. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.

Our point of view on Santova’s ROCE

Ultimately, Santova has proven its ability to adequately reinvest capital at good rates of return. Still, over the past five years, the stock has declined 20%, so the decline could offer an opening. This is why we believe it would be worthwhile to look further into this stock given that the fundamentals are attractive.

One more thing, we spotted 1 warning sign facing Santova that you might find interesting.

If you want to look for strong businesses with significant income, check out this free list of companies with good balance sheets and impressive returns on equity

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