We Like These Underlying Return On Capital Trends At Retail Food Group (ASX:RFG)

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Retail Food Group (ASX:RFG) so let's look a bit deeper.

Understanding 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 Retail Food Group is:

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

0.016 = AU$4.9m ÷ (AU$369m - AU$53m) (Based on the trailing twelve months to June 2024).

So, Retail Food Group has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.6%.

Check out our latest analysis for Retail Food Group

In the above chart we have measured Retail Food Group's 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 Retail Food Group .

What Can We Tell From Retail Food Group's ROCE Trend?

We're delighted to see that Retail Food Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.6% which is a sight for sore eyes. Not only that, but the company is utilizing 283% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Retail Food Group has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Retail Food Group's ROCE

In summary, it's great to see that Retail Food Group has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 39% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Retail Food Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While Retail Food Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.