Here's What's Concerning About Rectifier Technologies' (ASX:RFT) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Rectifier Technologies (ASX:RFT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Rectifier Technologies, this is the formula:

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

0.16 = AU$3.5m ÷ (AU$31m - AU$9.5m) (Based on the trailing twelve months to December 2024).

So, Rectifier Technologies has an ROCE of 16%. That's a pretty standard return and it's in line with the industry average of 16%.

View our latest analysis for Rectifier Technologies

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Rectifier Technologies' past further, check out this free graph covering Rectifier Technologies' past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Rectifier Technologies, we didn't gain much confidence. Around five years ago the returns on capital were 32%, but since then they've fallen to 16%. However it looks like Rectifier Technologies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Rectifier Technologies' ROCE

Bringing it all together, while we're somewhat encouraged by Rectifier Technologies' reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 77% in the last five years. Therefore based on the analysis done in this article, we don't think Rectifier Technologies has the makings of a multi-bagger.

If you want to continue researching Rectifier Technologies, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Rectifier Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.