Quarto Group (LON:QRT) Is Very Good At Capital Allocation
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Quarto Group (LON:QRT) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Quarto Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = US$22m ÷ (US$129m - US$43m) (Based on the trailing twelve months to December 2022).
Thus, Quarto Group has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Media industry average of 10%.
See our latest analysis for Quarto Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Quarto Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Quarto Group, check out these free graphs here.
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at Quarto Group. The data shows that returns on capital have increased by 344% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 23% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Bottom Line
In summary, it's great to see that Quarto Group has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a solid 47% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we've found 1 warning sign for Quarto Group that we think you should be aware of.
Quarto Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
