We Like These Underlying Return On Capital Trends At Croma Security Solutions Group (LON:CSSG)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Croma Security Solutions Group (LON:CSSG) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Croma Security Solutions Group, this is the formula:

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

0.042 = UK£548k ÷ (UK£19m - UK£6.2m) (Based on the trailing twelve months to December 2021).

Therefore, Croma Security Solutions Group has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 9.9%.

See our latest analysis for Croma Security Solutions Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Croma Security Solutions Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Croma Security Solutions Group, check out these free graphs here.

What Does the ROCE Trend For Croma Security Solutions Group Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.2%. The amount of capital employed has increased too, by 22%. So we're very much inspired by what we're seeing at Croma Security Solutions Group thanks to its ability to profitably reinvest capital.

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. Effectively this means that suppliers or short-term creditors are now funding 32% of the business, which is more than it was five years ago. 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.

Our Take On Croma Security Solutions Group's ROCE

In summary, it's great to see that Croma Security Solutions Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has only returned 2.7% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Croma Security Solutions Group does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those make us uncomfortable...

While Croma Security Solutions Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.