Slowing Rates Of Return At Reliance Worldwide (ASX:RWC) Leave Little Room For Excitement

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Reliance Worldwide's (ASX:RWC) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Reliance Worldwide, this is the formula:

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

0.12 = US$219m ÷ (US$2.1b - US$214m) (Based on the trailing twelve months to December 2024).

Therefore, Reliance Worldwide has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10.0% generated by the Building industry.

Check out our latest analysis for Reliance Worldwide

In the above chart we have measured Reliance Worldwide's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Reliance Worldwide for free.

What Does the ROCE Trend For Reliance Worldwide Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 34% more capital in the last five years, and the returns on that capital have remained stable at 12%. 12% is a pretty standard return, and it provides some comfort knowing that Reliance Worldwide has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Reliance Worldwide's ROCE

In the end, Reliance Worldwide has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 107% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we've found 1 warning sign for Reliance Worldwide that we think you should be aware of.

While Reliance Worldwide 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.