4C Group (STO:4C) Has More To Do To Multiply In Value Going Forward

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. That's why when we briefly looked at 4C Group's (STO:4C) ROCE trend, we were pretty happy with what we saw.

What Is 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. Analysts use this formula to calculate it for 4C Group:

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

0.12 = kr35m ÷ (kr394m - kr106m) (Based on the trailing twelve months to March 2023).

So, 4C Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 8.7% it's much better.

Check out our latest analysis for 4C Group

In the above chart we have measured 4C Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering 4C Group here for free.

SWOT Analysis for 4C Group

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 12% for the last three years, and the capital employed within the business has risen 239% in that time. 12% is a pretty standard return, and it provides some comfort knowing that 4C Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, 4C Group has done well to reduce current liabilities to 27% of total assets over the last three years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On 4C Group's ROCE

The main thing to remember is that 4C Group has proven its ability to continually reinvest at respectable rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last year. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

4C Group does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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. 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.