Returns On Capital At Auction Technology Group (LON:ATG) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Auction Technology Group (LON:ATG) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Auction Technology Group, this is the formula:

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

0.027 = UK£19m ÷ (UK£728m - UK£26m) (Based on the trailing twelve months to March 2023).

Therefore, Auction Technology Group has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.4%.

See 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, you can check out the forecasts from the analysts covering Auction Technology Group here for free.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Auction Technology Group in recent years. Over the past five years, ROCE has remained relatively flat at around 2.7% and the business has deployed 1,909% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Auction Technology Group has done well to reduce current liabilities to 3.6% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Auction Technology Group's ROCE

As we've seen above, Auction Technology Group's returns on capital haven't increased but it is reinvesting in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 19% in the last year. Therefore based on the analysis done in this article, we don't think Auction Technology Group has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Auction Technology Group that you might find interesting.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.