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If we are to find multi-bagger potential, there are often underlying trends that can provide clues. First, we would like to identify a growth to recover on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. To concern RATIONAL (ETR: RAA) he has a high ROCE right now, but let’s see how the returns move.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for RATIONAL, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.29 = € 167m ÷ (€ 710m – € 132m) (Based on the last twelve months up to June 2021).
So, RATIONAL has a ROCE of 29%. In absolute terms, this is a great return and it’s even better than the machinery industry average of 8.3%.
See our latest analysis for RATIONAL
In the graph above, we measured RATIONAL’s past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for RATIONAL.
What can we say about RATIONAL’s ROCE trend?
On the surface, the ROCE trend at RATIONAL does not inspire confidence. While it’s comforting that ROCE is high, it was 46% five years ago. On the flip side, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It may take some time for the business to begin to see a change in the benefits of these investments.
The basics on RATIONAL’s ROCE
To conclude, we have seen that RATIONAL is reinvesting in the business, but the returns are declining. Although the market should expect these trends to improve as the stock has gained 78% over the past five years. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is multi-bagging in the future.
One more thing, we spotted 1 warning sign facing RATIONAL that you might find interesting.
RATIONAL is not the only security to generate high returns. If you want to see more, check out our free List of companies delivering high returns on equity with strong fundamentals.
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 any of the stocks mentioned.
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