600 Group (LON:SIXH) Shareholders Will Want The ROCE Trajectory To Continue

By
Simply Wall St
Published
November 13, 2021
AIM:SIXH
Source: Shutterstock

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.064 = US$2.5m ÷ (US$64m - US$25m) (Based on the trailing twelve months to March 2021).

Therefore, 600 Group has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

Check out our latest analysis for 600 Group

roce
AIM:SIXH Return on Capital Employed November 14th 2021

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 600 Group's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at 600 Group. The figures show that over the last five years, returns on capital have grown by 366%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, 600 Group appears to been achieving more with less, since the business is using 59% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 39% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In a nutshell, we're pleased to see that 600 Group has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 61% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

600 Group does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those don't sit too well with us...

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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