Returns On Capital Are Showing Encouraging Signs At Ripley (SNSE:RIPLEY)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Ripley (SNSE:RIPLEY) and its trend of ROCE, we really liked what we saw.

Our free stock report includes 2 warning signs investors should be aware of before investing in Ripley. Read for free now.

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 Ripley:

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

0.045 = CL$94b ÷ (CL$3.9t - CL$1.8t) (Based on the trailing twelve months to December 2024).

So, Ripley has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 6.5%.

Check out our latest analysis for Ripley

In the above chart we have measured Ripley's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ripley .

What Can We Tell From Ripley's ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at Ripley promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 174% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a separate but related note, it's important to know that Ripley has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Ripley's ROCE

As discussed above, Ripley appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 113% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Ripley can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Ripley we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Ripley may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.