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Investors Will Want Excelsior Capital's (ASX:ECL) Growth In ROCE To Persist

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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So when we looked at Excelsior Capital (ASX:ECL) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Excelsior Capital, this is the formula:

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

0.16 = AU$9.3m ÷ (AU$71m - AU$14m) (Based on the trailing twelve months to December 2021).

Thus, Excelsior Capital has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 3.8% generated by the Electrical industry.

Check out our latest analysis for Excelsior Capital

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Excelsior Capital's ROCE against it's prior returns. If you're interested in investigating Excelsior Capital's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Excelsior Capital's ROCE Trending?

Excelsior Capital is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 70% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

What We Can Learn From Excelsior Capital's ROCE

In summary, we're delighted to see that Excelsior Capital has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 81% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Excelsior Capital that you might find interesting.

While Excelsior Capital isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.