If you’re looking at a mature business that’s past the growth phase, what are some of the underlying trends that emerge? When we see a decline to return to on capital employed (ROCE) in connection with a decrease based capital employed, this is often how a mature company shows signs of aging. This combination can tell you that the company is not only investing less, but earning less on what it invests. On that note, looking at RPS Group (LON:RPS), we weren’t too optimistic about how things were going.
What is return on capital employed (ROCE)?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on RPS Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.043 = £17m ÷ (£585m – £191m) (Based on the last twelve months to June 2021).
Thereby, RPS Group posted a ROCE of 4.3%. In absolute terms, this is a weak performance and it is also below the commercial services industry average of 11%.
See our latest analysis for RPS Group
In the chart above, we measured RPS Group’s past ROCE against its past performance, but the future is arguably more important. If you wish, you can view forecasts from analysts covering RPS Group here for free.
What does the ROCE trend tell us for RPS Group?
We are not inspired by the trend, given that the ROCE has decreased by 29% in the last five years and that RPS Group applies -25% less capital in the company, even after the capital increase that they conducted (before their latest published figures).
In this regard, we noticed that the ratio of current liabilities to total assets rose to 33%, which impacted ROCE. If current liabilities hadn’t risen as much as they did, ROCE might actually be even lower. Although the ratio is not too high currently, it is worth keeping an eye on it because if it becomes particularly high, then the company could face new elements of risk.
The Key Takeaway
In summary, it is unfortunate that the RPS group is reducing its capital base and also generating lower returns. Investors did not like these developments, as the stock fell 45% from five years ago. Unless there is a shift to a more positive trajectory in these measures, we would look elsewhere.
Finally we found 1 warning sign for the RPS group which we think you should be aware of.
Although RPS Group doesn’t get the highest return, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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