RATIONAL (ETR:RAA) Could Be Struggling To Allocate Capital

By
Simply Wall St
Published
April 12, 2022
XTRA:RAA
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at RATIONAL (ETR:RAA), it does have a high ROCE right now, but lets see how returns are trending.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on RATIONAL is:

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

0.25 = €158m ÷ (€784m - €146m) (Based on the trailing twelve months to December 2021).

So, RATIONAL has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Machinery industry average of 8.2%.

View our latest analysis for RATIONAL

roce
XTRA:RAA Return on Capital Employed April 12th 2022

Above you can see how the current ROCE for RATIONAL compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering RATIONAL here for free.

What Does the ROCE Trend For RATIONAL Tell Us?

On the surface, the trend of ROCE at RATIONAL doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 39%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On RATIONAL's ROCE

While returns have fallen for RATIONAL 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 followed suit returning a meaningful 46% to shareholders over 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.

Like most companies, RATIONAL does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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