Returns On Capital Signal Tricky Times Ahead For Arcontech Group (LON:ARC)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Arcontech Group (LON:ARC), we don’t think it’s current trends fit the mold of a multi-bagger.

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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 Arcontech Group is:

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

0.099 = UK£862k ÷ (UK£11m – UK£1.9m) (Based on the trailing twelve months to December 2024).

Thus, Arcontech Group has an ROCE of 9.9%. Even though it’s in line with the industry average of 10%, it’s still a low return by itself.

Check out our latest analysis for Arcontech Group

In the above chart we have measured Arcontech 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 Arcontech Group .

In terms of Arcontech Group’s historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 9.9% from 19% five years ago. However it looks like Arcontech Group might be reinvesting for long term growth because while capital employed has increased, the company’s sales haven’t changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Arcontech Group has decreased its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. 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.