Returns At AQ Group (STO:AQ) Appear To Be Weighed Down

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, the ROCE of AQ Group (STO:AQ) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for AQ Group, this is the formula:

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

0.13 = kr359m ÷ (kr3.9b - kr1.2b) (Based on the trailing twelve months to December 2020).

So, AQ Group has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Electrical industry.

Check out our latest analysis for AQ Group

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

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

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 99% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that AQ Group has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

The main thing to remember is that AQ Group has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 114% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing to note, we've identified 1 warning sign with AQ Group and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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