Auction Technology Group (LON:ATG) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Auction Technology Group's (LON:ATG) returns on capital, so let's have a look.

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 Auction Technology Group is:

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

0.0043 = UK£2.9m ÷ (UK£713m - UK£37m) (Based on the trailing twelve months to March 2022).

So, Auction Technology Group has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Online Retail industry average of 7.1%.

Our analysis indicates that ATG is potentially overvalued!

Above you can see how the current ROCE for Auction Technology Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Auction Technology Group.

What The Trend Of ROCE Can Tell Us

The fact that Auction Technology Group is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Auction Technology Group is utilizing 1,888% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 5.2%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Auction Technology Group's ROCE

In summary, it's great to see that Auction Technology Group has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 27% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

Auction Technology Group does have some risks though, and we've spotted 1 warning sign for Auction Technology Group that you might be interested in.

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.