We Like These Underlying Return On Capital Trends At Auction Technology Group (LON:ATG)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Auction Technology Group (LON:ATG) and its trend of ROCE, we really liked what we saw.

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 Auction Technology Group, this is the formula:

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).

Therefore, 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 12%.

Check out 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 Does the ROCE Trend For Auction Technology Group Tell Us?

We're delighted to see that Auction Technology Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 0.4% which is a sight for sore eyes. In addition to that, Auction Technology Group is employing 1,888% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

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. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From 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 30% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 1 warning sign for Auction Technology Group that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.