The Returns On Capital At 24SevenOffice Group (NGM:247) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think 24SevenOffice Group (NGM:247) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 24SevenOffice Group:

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

0.0082 = kr5.7m ÷ (kr761m - kr63m) (Based on the trailing twelve months to March 2021).

Thus, 24SevenOffice Group has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Software industry average of 12%.

View our latest analysis for 24SevenOffice Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for 24SevenOffice Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of 24SevenOffice Group, check out these free graphs here.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 6.3% three years ago, while the business's capital employed increased by 1,696%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence 24SevenOffice Group might not have received a full period of earnings contribution from it.

On a side note, 24SevenOffice Group has done well to pay down its current liabilities to 8.3% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On 24SevenOffice Group's ROCE

To conclude, we've found that 24SevenOffice Group is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 333% gain to shareholders who have held over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

24SevenOffice Group does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.

While 24SevenOffice 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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