Returns On Capital At Close the Loop (ASX:CLG) Have Hit The Brakes

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. So, when we ran our eye over Close the Loop's (ASX:CLG) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Close the Loop:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = AU$11m ÷ (AU$104m - AU$28m) (Based on the trailing twelve months to December 2022).

Therefore, Close the Loop has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 6.7% it's much better.

View our latest analysis for Close the Loop

roce

In the above chart we have measured Close the Loop's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Close the Loop.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 319% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Close the Loop's ROCE

In the end, Close the Loop has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 13% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Close the Loop and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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