Returns On Capital At Excelsior Capital (ASX:ECL) Have Stalled

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Excelsior Capital (ASX:ECL) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Excelsior Capital, this is the formula:

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

0.11 = AU$5.8m ÷ (AU$62m - AU$10.0m) (Based on the trailing twelve months to December 2020).

Thus, Excelsior Capital has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Electrical industry.

See our latest analysis for Excelsior Capital

Historical performance is a great place to start when researching a stock so above you can see the gauge for Excelsior Capital's ROCE against it's prior returns. If you're interested in investigating Excelsior Capital's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Things have been pretty stable at Excelsior Capital, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Excelsior Capital to be a multi-bagger going forward.

The Bottom Line On Excelsior Capital's ROCE

In summary, Excelsior Capital isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 57% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for Excelsior Capital you'll probably want to know about.

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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