Returns On Capital Signal Tricky Times Ahead For EXEO Group (TSE:1951)

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 EXEO Group (TSE:1951), it didn't seem to tick all of these boxes.

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. To calculate this metric for EXEO Group, this is the formula:

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

0.084 = JP¥35b ÷ (JP¥552b - JP¥140b) (Based on the trailing twelve months to September 2024).

Therefore, EXEO Group has an ROCE of 8.4%. On its own, that's a low figure but it's around the 8.9% average generated by the Construction industry.

View our latest analysis for EXEO Group

Above you can see how the current ROCE for EXEO 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 analyst report for EXEO Group .

What Can We Tell From EXEO Group's ROCE Trend?

On the surface, the trend of ROCE at EXEO Group doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. 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.

What We Can Learn From EXEO Group's ROCE

To conclude, we've found that EXEO Group is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 48% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching EXEO Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While EXEO 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.