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Friday, October 07, 2022

Capital Allocation Trends At Silgan Holdings (NASDAQ:SLGN) Aren’t Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. First, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. However, after investigating Silgan Holdings (NASDAQ:SLGN), we don’t think it’s current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Silgan Holdings:

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

0.094 = US$591m (US$7.8b – US$1.5b) (Based on the trailing twelve months to December 2021),

Therefore, Silgan Holdings has an ROCE of 9.4%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 9.4%.

Check out our latest analysis for Silgan Holdings

roce
NasdaqGS:SLGN Return on Capital Employed February 13th 2022

In the above chart we have measured Silgan Holdings’ prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Silgan Holdings.

So How Is Silgan Holdings’ ROCE Trending?

In terms of Silgan Holdings’ historical ROCE movements, the trend isnt fantastic. Around five years ago the returns on capital were 14%, but since then they’ve fallen to 9.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion…

While returns have fallen for Silgan Holdings in recent times, we’re encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 51% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you’d like to know more about Silgan Holdings, we’ve spotted 2 warning signs, and 1 of them is concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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