Here's What's Concerning About RediShred Capital's (CVE:KUT) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at RediShred Capital (CVE:KUT), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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 RediShred Capital:

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

0.00032 = CA$16k ÷ (CA$59m - CA$8.7m) (Based on the trailing twelve months to September 2020).

Therefore, RediShred Capital has an ROCE of 0.03%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.6%.

See our latest analysis for RediShred Capital

Above you can see how the current ROCE for RediShred Capital 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 RediShred Capital.

What Can We Tell From RediShred Capital's ROCE Trend?

On the surface, the trend of ROCE at RediShred Capital doesn't inspire confidence. To be more specific, ROCE has fallen from 9.7% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

While returns have fallen for RediShred Capital in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 233% 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 would look further into this stock to make sure the other metrics justify the positive view.

If you want to know some of the risks facing RediShred Capital we've found 5 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While RediShred Capital isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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