Quarto Group (LON:QRT) Is Very Good At Capital Allocation

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Quarto Group (LON:QRT) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

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 Quarto Group is:

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

0.27 = US$20m ÷ (US$124m - US$52m) (Based on the trailing twelve months to June 2022).

Thus, Quarto Group has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Media industry average of 12%.

View our latest analysis for Quarto Group

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'd like to look at how Quarto 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?

Quarto Group has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 295%. The company is now earning US$0.3 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 45% 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 42% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

From what we've seen above, Quarto Group has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 15% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Quarto Group does come with some risks, and we've found 1 warning sign that you should be aware of.

Quarto Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.