Auction Technology Group's (LON:ATG) Returns On Capital Not Reflecting Well On The Business

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Auction Technology Group (LON:ATG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Auction Technology Group is:

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

0.041 = US$34m ÷ (US$865m - US$41m) (Based on the trailing twelve months to September 2024).

So, Auction Technology Group has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 10%.

Check out our latest analysis for Auction Technology Group

In the above chart we have measured Auction Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Auction Technology Group .

So How Is Auction Technology Group's ROCE Trending?

On the surface, the trend of ROCE at Auction Technology Group doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 4.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 side note, Auction Technology Group has done well to pay down its current liabilities to 4.8% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Auction Technology Group's ROCE

Bringing it all together, while we're somewhat encouraged by Auction Technology Group's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 50% in the last three years. Therefore based on the analysis done in this article, we don't think Auction Technology Group has the makings of a multi-bagger.

Auction Technology Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for ATG on our platform quite valuable.

While Auction Technology 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.