RATIONAL (ETR:RAA) Looks To Prolong Its Impressive Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, the ROCE of RATIONAL (ETR:RAA) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

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)

0.39 = €277m ÷ (€918m - €203m) (Based on the trailing twelve months to September 2023).

So, RATIONAL has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

See our latest analysis for RATIONAL

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 for free.

What Can We Tell From RATIONAL's ROCE Trend?

In terms of RATIONAL's history of ROCE, it's quite impressive. The company has consistently earned 39% for the last five years, and the capital employed within the business has risen 65% in that time. Now considering ROCE is an attractive 39%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If RATIONAL can keep this up, we'd be very optimistic about its future.

What We Can Learn From RATIONAL's ROCE

In short, we'd argue RATIONAL has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 45% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 1 warning sign facing RATIONAL that you might find interesting.

RATIONAL is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.