What Do The Returns At Scholium Group (LON:SCHO) Mean Going Forward?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at Scholium Group (LON:SCHO) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Scholium Group:

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

0.0039 = UK£38k ÷ (UK£11m - UK£1.3m) (Based on the trailing twelve months to March 2020).

Thus, Scholium Group has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 12%.

See our latest analysis for Scholium 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 Scholium Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Scholium Group has broken into profitability. The company now earns 0.4% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Scholium Group has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From Scholium Group's ROCE

To bring it all together, Scholium Group has done well to increase the returns it's generating from its capital employed. Given the stock has declined 21% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 1 warning sign for Scholium Group you'll probably want to know about.

While Scholium 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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