The Return Trends At Chemring Group (LON:CHG) Look Promising
There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Chemring Group (LON:CHG) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Chemring Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£51m ÷ (UK£532m - UK£103m) (Based on the trailing twelve months to October 2021).
Thus, Chemring Group has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Aerospace & Defense industry average of 11%.
Check out our latest analysis for Chemring Group
Above you can see how the current ROCE for Chemring 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 Chemring Group.
What Can We Tell From Chemring Group's ROCE Trend?
You'd find it hard not to be impressed with the ROCE trend at Chemring Group. The data shows that returns on capital have increased by 104% 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. In regards to capital employed, Chemring Group appears to been achieving more with less, since the business is using 31% less capital to run its operation. Chemring Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line On Chemring Group's ROCE
In the end, Chemring Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 54% 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. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing to note, we've identified 1 warning sign with Chemring Group and understanding it should be part of your investment process.
While Chemring 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.
