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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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Keystone Law Group's (LON:KEYS) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Keystone Law Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.47 = UK£9.4m ÷ (UK£41m - UK£21m) (Based on the trailing twelve months to January 2024).
Thus, Keystone Law Group has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 17%.
View our latest analysis for Keystone Law Group
Above you can see how the current ROCE for Keystone Law 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 analyst report for Keystone Law Group .
What Can We Tell From Keystone Law Group's ROCE Trend?
Keystone Law Group is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 47%. The amount of capital employed has increased too, by 22%. So we're very much inspired by what we're seeing at Keystone Law Group thanks to its ability to profitably reinvest capital.
On a separate but related note, it's important to know that Keystone Law Group has a current liabilities to total assets ratio of 52%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Keystone Law Group's ROCE
In summary, it's great to see that Keystone Law Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 58% return over the last five years. In light of that, we think it's worth looking further into this stock because if Keystone Law Group can keep these trends up, it could have a bright future ahead.