A Look Into Andrews Sykes Group's (LON:ASY) Impressive Returns On Capital

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, the ROCE of Andrews Sykes Group (LON:ASY) looks attractive right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on Andrews Sykes Group is:

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

0.25 = UK£19m ÷ (UK£96m - UK£18m) (Based on the trailing twelve months to June 2020).

Thus, Andrews Sykes Group has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 12%.

Check out our latest analysis for Andrews Sykes Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Andrews Sykes Group's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

It's hard not to be impressed by Andrews Sykes Group's returns on capital. The company has consistently earned 25% for the last five years, and the capital employed within the business has risen 69% in that time. Now considering ROCE is an attractive 25%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Andrews Sykes Group can keep this up, we'd be very optimistic about its future.

Our Take On Andrews Sykes Group's ROCE

In short, we'd argue Andrews Sykes Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 150% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 1 warning sign for Andrews Sykes Group you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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