Returns On Capital At Rába Jármûipari Holding Nyrt (BUSE:RABA) Paint A Concerning Picture

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Rába Jármûipari Holding Nyrt (BUSE:RABA), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

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 Rába Jármûipari Holding Nyrt:

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

0.019 = Ft458m ÷ (Ft44b - Ft19b) (Based on the trailing twelve months to March 2020).

Thus, Rába Jármûipari Holding Nyrt has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.5%.

View our latest analysis for Rába Jármûipari Holding Nyrt

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rába Jármûipari Holding Nyrt's ROCE against it's prior returns. If you'd like to look at how Rába Jármûipari Holding Nyrt has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Rába Jármûipari Holding Nyrt, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.5% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Rába Jármûipari Holding Nyrt becoming one if things continue as they have.

On a separate but related note, it's important to know that Rába Jármûipari Holding Nyrt has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Rába Jármûipari Holding Nyrt's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Rába Jármûipari Holding Nyrt does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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