Slowing Rates Of Return At Ridley (ASX:RIC) Leave Little Room For Excitement

By
Simply Wall St
Published
April 19, 2022
ASX:RIC
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Ridley (ASX:RIC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Ridley:

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

0.12 = AU$44m ÷ (AU$561m - AU$201m) (Based on the trailing twelve months to December 2021).

Thus, Ridley has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Food industry.

See our latest analysis for Ridley

roce
ASX:RIC Return on Capital Employed April 19th 2022

Above you can see how the current ROCE for Ridley compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ridley.

What Can We Tell From Ridley's ROCE Trend?

Things have been pretty stable at Ridley, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Ridley doesn't end up being a multi-bagger in a few years time. On top of that you'll notice that Ridley has been paying out a large portion (61%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

The Key Takeaway

We can conclude that in regards to Ridley's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 48% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 1 warning sign for Ridley you'll probably want to know about.

While Ridley 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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