If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating RATH (VIE:RAT), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on RATH is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = €2.8m ÷ (€117m - €38m) (Based on the trailing twelve months to June 2022).
Therefore, RATH has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.6%.
Check out our latest analysis for RATH
Historical performance is a great place to start when researching a stock so above you can see the gauge for RATH's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of RATH, check out these free graphs here.
SWOT Analysis for RATH
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings.
- Dividend is low compared to the top 25% of dividend payers in the Basic Materials market.
- Current share price is above our estimate of fair value.
- RAT's financial characteristics indicate limited near-term opportunities for shareholders.
- Lack of analyst coverage makes it difficult to determine RAT's earnings prospects.
- Debt is not well covered by operating cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at RATH, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 8.4% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that RATH is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 82% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
On a final note, we found 5 warning signs for RATH (3 are potentially serious) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About WBAG:RAT
RATH
Engages in the production and sale of refractory materials in Europe, Africa, the Middle East, the Americas, and the Asia Pacific.
Slight and slightly overvalued.
