Returns On Capital At Reko International Group (CVE:REKO) Paint A Concerning Picture

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Reko International Group (CVE:REKO), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Reko International Group:

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

0.043 = CA$2.1m ÷ (CA$63m - CA$14m) (Based on the trailing twelve months to January 2023).

Therefore, Reko International Group has an ROCE of 4.3%. On its own, that's a low figure but it's around the 4.8% average generated by the Machinery industry.

See 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 of past earnings, revenue and cash flow.

What Can We Tell From Reko International Group's ROCE Trend?

There is reason to be cautious about Reko International Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.6% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Reko International Group to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 62% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Reko International Group (at least 1 which can't be ignored) , and understanding these would certainly be useful.

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.