SPAR Group (NASDAQ:SGRP) Is Investing Its Capital With Increasing Efficiency


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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we’re seeing at SPAR Group’s (NASDAQ:SGRP) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for SPAR Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.21 = US$8.5m ÷ (US$100m – US$59m) (Based on the trailing twelve months to June 2022).

So, SPAR Group has an ROCE of 21%. In absolute terms that’s a great return and it’s even better than the Media industry average of 7.4%.

Check out the opportunities and risks within the US Media industry.

NasdaqCM:SGRP Return on Capital Employed October 26th 2022

Above you can see how the current ROCE for SPAR Group 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 report on analyst forecasts for the company.

The Trend Of ROCE

The trends we’ve noticed at SPAR Group are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. The amount of capital employed has increased too, by 66%. So we’re very much inspired by what we’re seeing at SPAR Group thanks to its ability to profitably reinvest capital.

On a separate but related note, it’s important to know that SPAR Group has a current liabilities to total assets ratio of 59%, which we’d consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion…

In summary, it’s great to see that SPAR Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 89% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it’s worth looking further into this stock because if SPAR Group can keep these trends up, it could have a bright future ahead.

On a separate note, we’ve found 2 warning signs for SPAR Group you’ll probably want to know about.

SPAR Group is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Valuation is complex, but we’re helping make it simple.

Find out whether SPAR Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.

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