Should You Be Impressed By RediShred Capital's (CVE:KUT) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think RediShred Capital (CVE:KUT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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).

Thus, RediShred Capital has an ROCE of 0.03%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.3%.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at RediShred Capital, we didn't gain much 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.

The Bottom Line On RediShred Capital's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for RediShred Capital. And long term investors must be optimistic going forward because the stock has returned a huge 180% to shareholders in the last five years. 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 concerning!) 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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This article by Simply Wall St is general in nature. 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.
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