Richelieu Hardware (TSE:RCH) Has More To Do To Multiply In Value Going Forward

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Richelieu Hardware (TSE:RCH) looks decent, right now, so lets see what the trend of returns can tell us.

What Is 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. To calculate this metric for Richelieu Hardware, this is the formula:

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

0.18 = CA$191m ÷ (CA$1.3b - CA$253m) (Based on the trailing twelve months to August 2023).

Therefore, Richelieu Hardware has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 15% generated by the Trade Distributors industry.

Check out our latest analysis for Richelieu Hardware

Above you can see how the current ROCE for Richelieu Hardware 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 Richelieu Hardware.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 122% in that time. 18% is a pretty standard return, and it provides some comfort knowing that Richelieu Hardware 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 Richelieu Hardware's ROCE

To sum it up, Richelieu Hardware has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 107% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Richelieu Hardware does have some risks though, and we've spotted 1 warning sign for Richelieu Hardware that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.