This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Reitmans (Canada) Limited (TSE:RET.A)’s return fundamentals and stock market performance.
Purchasing Reitmans (Canada) gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to RET.A’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Reitmans (Canada)’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
ROCE: Explanation and Calculation
Choosing to invest in Reitmans (Canada) comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at Reitmans (Canada)’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. RET.A’s ROCE is calculated below:
ROCE Calculation for RET.A
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = CA$10.43m ÷ (CA$496.76m – CA$120.43m) = 2.77%
RET.A’s 2.77% ROCE means that for every CA$100 you invest, the company creates CA$2.8. A good ROCE hurdle you should aim for in your investments is 15%, which RET.A has missed by a wide margin, meaning the company creates a poor amount of earnings from capital employed.
What is causing this?
Reitmans (Canada)’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Reitmans (Canada) is in an adverse position, but this can change if these factors improve. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you’ll find that RET.A’s ROCE has decreased from 4.61%. Over the same period, EBT went from CA$21.14m to CA$10.43m and capital employed declined as well albeit by a relatively smaller amount, signifying ROCE decreased as a result of a greater fall in earnings compared to the business’ use of capital.
RET.A’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like the management team and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Reitmans (Canada)’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Valuation: What is RET.A worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether RET.A is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.