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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, QinetiQ Group (LON:QQ.) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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 QinetiQ Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = UK£224m ÷ (UK£2.0b - UK£601m) (Based on the trailing twelve months to September 2024).
Therefore, QinetiQ Group has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Aerospace & Defense industry average of 14%.
Check out our latest analysis for QinetiQ Group
In the above chart we have measured QinetiQ 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 analyst report for QinetiQ Group .
So How Is QinetiQ Group's ROCE Trending?
Investors would be pleased with what's happening at QinetiQ Group. The data shows that returns on capital have increased substantially over the last five years to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 44%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line
To sum it up, QinetiQ Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 28% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
While QinetiQ Group looks impressive, no company is worth an infinite price. The intrinsic value infographic for QQ. helps visualize whether it is currently trading for a fair price.