Is There More Growth In Store For RPMGlobal Holdings' (ASX:RUL) Returns On Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at RPMGlobal Holdings (ASX:RUL) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for RPMGlobal Holdings, this is the formula:

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

0.07 = AU$4.6m ÷ (AU$90m - AU$25m) (Based on the trailing twelve months to December 2019).

So, RPMGlobal Holdings has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Software industry average of 16%.

View our latest analysis for RPMGlobal Holdings

Above you can see how the current ROCE for RPMGlobal Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for RPMGlobal Holdings.

What Does the ROCE Trend For RPMGlobal Holdings Tell Us?

Shareholders will be relieved that RPMGlobal Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 7.0% on its capital. While returns have increased, the amount of capital employed by RPMGlobal Holdings has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

What We Can Learn From RPMGlobal Holdings' ROCE

As discussed above, RPMGlobal Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 70% return over the last five years. 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.

On a separate note, we've found 1 warning sign for RPMGlobal Holdings you'll probably want to know about.

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This article by Simply Wall St is general in nature. 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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