Should We Be Excited About The Trends Of Returns At Go-Ahead Group (LON:GOG)?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Go-Ahead Group (LON:GOG), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Go-Ahead Group:

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

0.052 = UK£51m ÷ (UK£2.3b - UK£1.3b) (Based on the trailing twelve months to June 2020).

Therefore, Go-Ahead Group has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Transportation industry average of 6.9%.

Check out our latest analysis for Go-Ahead Group

Above you can see how the current ROCE for Go-Ahead Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Go-Ahead Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.2% from 20% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Go-Ahead Group's current liabilities are still rather high at 57% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Go-Ahead Group's ROCE

In summary, Go-Ahead Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 45% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Go-Ahead Group has the makings of a multi-bagger.

Go-Ahead Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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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