There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Quarto Group (LON:QRT) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Quarto Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = US$20m ÷ (US$124m - US$52m) (Based on the trailing twelve months to June 2022).
So, Quarto Group has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
View our latest analysis for Quarto Group
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Quarto Group's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Quarto Group's ROCE Trending?
Quarto Group has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 295%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Quarto Group appears to been achieving more with less, since the business is using 45% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 42% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
In the end, Quarto Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 15% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing to note, we've identified 1 warning sign with Quarto Group and understanding this should be part of your investment process.
Quarto Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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