If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Quarto Group's (LON:QRT) returns on capital, so let's have a 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. To calculate this metric for Quarto Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$17m ÷ (US$140m - US$51m) (Based on the trailing twelve months to June 2021).
Thus, Quarto Group has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Media industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Quarto Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Quarto Group Tell Us?
You'd find it hard not to be impressed with the ROCE trend at Quarto Group. The figures show that over the last five years, returns on capital have grown by 71%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 33% less capital than it was five years ago. Quarto Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 37% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The Bottom Line On Quarto Group's ROCE
In summary, it's great to see that Quarto Group has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 67% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a final note, we've found 2 warning signs for Quarto Group that we think you should be aware of.
While Quarto 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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