600 Group (LON:SIXH) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at 600 Group (LON:SIXH) and its trend of ROCE, we really liked what we saw.

What is 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 600 Group:

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

0.074 = US$3.7m ÷ (US$68m - US$17m) (Based on the trailing twelve months to September 2021).

Thus, 600 Group has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

Check out our latest analysis for 600 Group

Above you can see how the current ROCE for 600 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.

So How Is 600 Group's ROCE Trending?

We're pretty happy with how the ROCE has been trending at 600 Group. The data shows that returns on capital have increased by 280% over the trailing five years. The company is now earning US$0.07 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 35% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

In summary, it's great to see that 600 Group has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 1.8% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to know some of the risks facing 600 Group we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While 600 Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.