What Do The Returns On Capital At Aukett Swanke Group (LON:AUK) Tell Us?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Aukett Swanke Group (LON:AUK), it didn't seem to tick all of these boxes.

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

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 Aukett Swanke Group is:

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

0.038 = UK£324k ÷ (UK£14m - UK£5.1m) (Based on the trailing twelve months to March 2020).

So, Aukett Swanke Group has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 12%.

View our latest analysis for Aukett Swanke Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Aukett Swanke Group's ROCE against it's prior returns. If you'd like to look at how Aukett Swanke Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Aukett Swanke Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.8% from 20% five years ago. However it looks like Aukett Swanke Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Aukett Swanke Group has decreased its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Aukett Swanke Group's reinvestment in its own business, we're aware that returns are shrinking. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 79% over the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Aukett Swanke Group, we've spotted 4 warning signs, and 3 of them are a bit concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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