If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. And in light of that, the trends we're seeing at Keystone Law Group's (LON:KEYS) look very promising so lets take a look.

What Is 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. The formula for this calculation on Keystone Law Group is:

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

0.45 = UK£8.3m ÷ (UK£38m - UK£20m) (Based on the trailing twelve months to January 2023).

Therefore, Keystone Law Group has an ROCE of 45%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 16%.

Check out our latest analysis for Keystone Law Group  roce

In the above chart we have measured Keystone Law Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our freereport on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Keystone Law Group are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 45%. Basically the business is earning more per dollar of capital invested and in addition to that, 40% more capital is being employed now too. 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 effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

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. Since the stock has returned a solid 71% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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 Keystone Law Group and understanding it should be part of your investment process.

Keystone Law Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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