Many Would Be Envious Of REA Group's (ASX:REA) Excellent Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of REA Group (ASX:REA) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding 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. Analysts use this formula to calculate it for REA Group:

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

0.33 = AU$776m ÷ (AU$2.7b - AU$368m) (Based on the trailing twelve months to December 2024).

Therefore, REA Group has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.

Check out our latest analysis for REA Group

In the above chart we have measured REA Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for REA Group .

How Are Returns Trending?

In terms of REA Group's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 33% and the business has deployed 58% more capital into its operations. Now considering ROCE is an attractive 33%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If REA Group can keep this up, we'd be very optimistic about its future.

The Bottom Line

In summary, we're delighted to see that REA Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And long term investors would be thrilled with the 143% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

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

REA Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.