If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Reko International Group (CVE:REKO) and its ROCE trend, we weren't exactly thrilled.
What Is 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. To calculate this metric for Reko International Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0078 = CA$384k ÷ (CA$58m - CA$8.6m) (Based on the trailing twelve months to April 2025).
Thus, Reko International Group has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.
View our latest analysis for Reko International Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Reko International Group's ROCE against it's prior returns. If you're interested in investigating Reko International Group's past further, check out this free graph covering Reko International Group's past earnings, revenue and cash flow.
What Does the ROCE Trend For Reko International Group Tell Us?
Things have been pretty stable at Reko International Group, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Reko International Group in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Key Takeaway
In summary, Reko International Group isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 75% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you'd like to know more about Reko International Group, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.