Ribo Fashion Group (SHSE:603196) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Ribo Fashion Group's (SHSE:603196) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Ribo Fashion Group, this is the formula:

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

0.0078 = CN¥6.4m ÷ (CN¥1.1b - CN¥261m) (Based on the trailing twelve months to March 2024).

So, Ribo Fashion Group has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 6.5%.

Check out our latest analysis for Ribo Fashion Group

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ribo Fashion Group has performed in the past in other metrics, you can view this free graph of Ribo Fashion Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Ribo Fashion Group Tell Us?

While there are companies with higher returns on capital out there, we still find the trend at Ribo Fashion Group promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 52% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Ribo Fashion Group's ROCE

To bring it all together, Ribo Fashion Group has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 10% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

While Ribo Fashion Group looks impressive, no company is worth an infinite price. The intrinsic value infographic for 603196 helps visualize whether it is currently trading for a fair price.

While Ribo Fashion Group 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. 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.