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If you are looking for a multi-bagger, there are a few things to look out for. In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked RealTech (ETR: RTC) and its trend of ROCE, we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the “return†(profit before tax) that a business generates on capital employed in its business. To calculate this metric for RealTech, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.061 = 596 K € ÷ (13 M € – 3.7 M €) (Based on the last twelve months up to June 2021).
So, RealTech has a ROCE of 6.1%. In absolute terms, this is a low return and it is also below the IT industry average of 10%.
Check out our latest analysis for RealTech
Historical performance is a great place to start when researching a stock, so above you can see RealTech’s ROCE gauge against past returns. If you want to look at RealTech’s performance in the past in other metrics, you can check out this free graph of past income, income and cash flow.
What the ROCE trend can tell us
Like most people, we’re excited that RealTech is now generating pre-tax profits. While the business is now profitable, it incurred losses on the capital invested five years ago. At first glance, it seems that the company is increasingly efficient at generating returns, as over the same period the amount of capital employed has decreased by 37%. RealTech could sell underperforming assets as ROCE improves.
In another part of our analysis, we noticed that the ratio of the company’s current liabilities to total assets decreased to 28%, which means overall that the company relies less on its suppliers or its short-term creditors to finance its operations. Shareholders would therefore be delighted if the growth in returns was primarily driven by underlying business performance.
The bottom line
Ultimately, RealTech has proven that its capital allocation skills are good with those higher returns for less capital. And given that the stock has remained fairly stable over the past five years, there could be an opportunity here if other metrics are strong. It therefore seems justified to continue researching this company and determine whether or not these trends will continue.
On a separate note, we have found 2 warning signs for RealTech you will probably want to know more.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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