Some Investors May Be Worried About RATIONAL's (ETR:RAA) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Looking at RATIONAL (ETR:RAA), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for RATIONAL, this is the formula:

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

0.29 = €167m ÷ (€710m - €132m) (Based on the trailing twelve months to June 2021).

So, RATIONAL has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Machinery industry average of 8.3%.

See our latest analysis for RATIONAL

In the above chart we have measured RATIONAL's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for RATIONAL.

What Can We Tell From RATIONAL's ROCE Trend?

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 46%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On RATIONAL's ROCE

To conclude, we've found that RATIONAL is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 78% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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.

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.

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