What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. And in light of that, the trends we're seeing at Keystone Law Group's (LON:KEYS) look very promising so lets take a look.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Keystone Law Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = UK£5.5m ÷ (UK£33m - UK£15m) (Based on the trailing twelve months to January 2021).
Therefore, Keystone Law Group has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 13%.
Above you can see how the current ROCE for Keystone Law 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 The Trend Of ROCE Can Tell Us
Keystone Law Group is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 31%. The amount of capital employed has increased too, by 119%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Another thing to note, Keystone Law Group has a high ratio of current liabilities to total assets of 46%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Keystone Law Group's ROCE
To sum it up, Keystone Law Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we've spotted 2 warning signs facing Keystone Law Group that you might find interesting.
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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