There Are Reasons To Feel Uneasy About Go-Ahead Group's (LON:GOG) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Go-Ahead Group (LON:GOG), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. 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)

0.056 = UK£47m ÷ (UK£2.0b - UK£1.2b) (Based on the trailing twelve months to January 2021).

Thus, Go-Ahead Group has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.5%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Go-Ahead Group.

The Trend Of ROCE

On the surface, the trend of ROCE at Go-Ahead Group doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. However it looks like Go-Ahead Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that Go-Ahead Group has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. 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 Key Takeaway

To conclude, we've found that Go-Ahead Group is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, Go-Ahead Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While Go-Ahead 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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