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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at REACT Group (LON:REAT) and its trend of ROCE, we really 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 REACT Group:

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

0.07 = UK￡697k ÷ (UK￡15m - UK￡5.3m) (Based on the trailing twelve months to March 2024).

Thus, REACT Group has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.1%.

View our latest analysis for REACT Group

In the above chart we have measured REACT Group'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 analyst report for REACT Group .

What Does the ROCE Trend For REACT Group Tell Us?

We're delighted to see that REACT Group is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.0% on its capital. Not only that, but the company is utilizing 900% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From REACT Group's ROCE

Long story short, we're delighted to see that REACT Group's reinvestment activities have paid off and the company is now profitable. And a remarkable 259% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 2 warning signs facing REACT Group that you might find interesting.