QinetiQ Group (LON:QQ.) Could Be Struggling To Allocate Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think QinetiQ Group (LON:QQ.) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on QinetiQ Group is:

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

0.091 = UK£138m ÷ (UK£2.0b - UK£518m) (Based on the trailing twelve months to September 2023).

So, QinetiQ Group has an ROCE of 9.1%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 13%.

Check out our latest analysis for QinetiQ Group

Above you can see how the current ROCE for QinetiQ 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.

What Can We Tell From QinetiQ Group's ROCE Trend?

On the surface, the trend of ROCE at QinetiQ Group doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for QinetiQ Group. In light of this, the stock has only gained 37% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

QinetiQ Group does have some risks though, and we've spotted 1 warning sign for QinetiQ Group that you might be interested in.

While QinetiQ Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.