Returns On Capital At QinetiQ Group (LON:QQ.) Have Stalled
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of QinetiQ Group (LON:QQ.) looks decent, right now, so lets see what the trend of returns can tell us.
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. Analysts use this formula to calculate it for QinetiQ Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£180m ÷ (UK£2.1b - UK£608m) (Based on the trailing twelve months to March 2023).
Therefore, QinetiQ Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Aerospace & Defense industry average of 10% it's much better.
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, you can check out the forecasts from the analysts covering QinetiQ Group here for free.
What Does the ROCE Trend For QinetiQ Group Tell Us?
While the current returns on capital are decent, they haven't changed much. The company has employed 73% more capital in the last five years, and the returns on that capital have remained stable at 12%. 12% is a pretty standard return, and it provides some comfort knowing that QinetiQ Group has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On QinetiQ Group's ROCE
In the end, QinetiQ Group has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 32% over the last five years for shareholders who have owned the stock in this period. So to determine if QinetiQ Group is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
QinetiQ Group does have some risks though, and we've spotted 1 warning sign for QinetiQ Group that you might be interested in.
While QinetiQ Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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