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There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Strix Group's (LON:KETL) look very promising so lets take a look.
Understanding 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. Analysts use this formula to calculate it for Strix Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = UK£32m ÷ (UK£118m - UK£34m) (Based on the trailing twelve months to December 2020).
So, Strix Group has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
In the above chart we have measured Strix Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Strix Group's ROCE Trend?
We're pretty happy with how the ROCE has been trending at Strix Group. We found that the returns on capital employed over the last five years have risen by 270%. 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, Strix Group appears to been achieving more with less, since the business is using 63% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
One more thing to note, Strix Group has decreased current liabilities to 28% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Bottom Line On Strix Group's ROCE
From what we've seen above, Strix Group has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 146% to shareholders over the last three years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One final note, you should learn about the 4 warning signs we've spotted with Strix Group (including 1 which shouldn't be ignored) .
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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