Yahoo Finance We're Watching These Trends At QinetiQ Group (LON:QQ.)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at QinetiQ Group (LON:QQ.) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for QinetiQ Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£131m ÷ (UK£1.5b - UK£396m) (Based on the trailing twelve months to September 2020).
So, QinetiQ Group has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Aerospace & Defense industry.
See our latest analysis for QinetiQ Group
Above you can see how the current ROCE for QinetiQ Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for QinetiQ Group.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at QinetiQ Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 33% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a related note, QinetiQ Group has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On QinetiQ Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that QinetiQ Group is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 44% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you'd like to know about the risks facing QinetiQ Group, we've discovered 2 warning signs that you should be aware of.
While QinetiQ Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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