QinetiQ Group (LON:QQ.) Could Be Struggling To Allocate Capital
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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating QinetiQ Group (LON:QQ.), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on QinetiQ Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = UK£138m ÷ (UK£2.0b - UK£518m) (Based on the trailing twelve months to September 2023).
Therefore, QinetiQ Group has an ROCE of 9.1%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 13%.
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.
The Trend Of ROCE
When we looked at the ROCE trend at QinetiQ Group, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.1%. 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.
Our Take On QinetiQ Group's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for QinetiQ Group. These trends are starting to be recognized by investors since the stock has delivered a 29% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
One more thing to note, we've identified 1 warning sign with QinetiQ Group and understanding it should be part of your investment process.
While QinetiQ Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
