In This Article:
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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Croma Security Solutions Group (LON:CSSG) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Croma Security Solutions Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = UK£548k ÷ (UK£19m - UK£6.2m) (Based on the trailing twelve months to December 2021).
Therefore, Croma Security Solutions Group has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 9.9%.
View our latest analysis for Croma Security Solutions Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Croma Security Solutions Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Croma Security Solutions Group, check out these free graphs here.
What Can We Tell From Croma Security Solutions Group's ROCE Trend?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.2%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. So we're very much inspired by what we're seeing at Croma Security Solutions Group thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 32% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.