Investors Should Be Encouraged By Strix Group's (LON:KETL) Returns On Capital

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Strix Group's (LON:KETL) look very promising so lets take a look.

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. The formula for this calculation on Strix Group is:

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

0.33 = UK£34m ÷ (UK£138m - UK£35m) (Based on the trailing twelve months to December 2021).

Therefore, Strix Group has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Electronic industry average of 11%.

See our latest analysis for Strix Group

In the above chart we have measured Strix Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Strix Group.

So How Is Strix Group's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Strix Group. We found that the returns on capital employed over the last five years have risen by 205%. The company is now earning UK£0.3 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 59% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

One more thing to note, Strix Group has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Strix Group's ROCE

From what we've seen above, Strix Group has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 3.4% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Strix Group does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.

Strix 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.