Here's What's Concerning About RAS Technology Holdings' (ASX:RTH) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into RAS Technology Holdings (ASX:RTH), the trends above didn't look too great.

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What Is 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 RAS Technology Holdings, this is the formula:

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

0.036 = AU$593k ÷ (AU$21m - AU$4.4m) (Based on the trailing twelve months to December 2024).

So, RAS Technology Holdings has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 16%.

Check out our latest analysis for RAS Technology Holdings

In the above chart we have measured RAS Technology Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for RAS Technology Holdings .

So How Is RAS Technology Holdings' ROCE Trending?

We are a bit worried about the trend of returns on capital at RAS Technology Holdings. To be more specific, the ROCE was 6.1% three years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last three years. If these trends continue, we wouldn't expect RAS Technology Holdings to turn into a multi-bagger.

Our Take On RAS Technology Holdings' ROCE

In summary, it's unfortunate that RAS Technology Holdings is generating lower returns from the same amount of capital. However the stock has delivered a 54% return to shareholders over the last three years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 2 warning signs for RAS Technology Holdings (1 can't be ignored) you should be aware of.

While RAS Technology Holdings 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.