If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Sempra's (NYSE:SRE) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sempra is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = US$3.6b ÷ (US$87b - US$10b) (Based on the trailing twelve months to December 2023).
So, Sempra has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.
Above you can see how the current ROCE for Sempra compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sempra for free.
What Does the ROCE Trend For Sempra Tell Us?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 45% more capital is being employed now too. So we're very much inspired by what we're seeing at Sempra thanks to its ability to profitably reinvest capital.
Our Take On Sempra's ROCE
To sum it up, Sempra has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 29% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
One more thing, we've spotted 2 warning signs facing Sempra that you might find interesting.
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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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.