There Are Reasons To Feel Uneasy About RATIONAL's (ETR:RAA) Returns On Capital

By
Simply Wall St
Published
January 10, 2022
XTRA:RAA
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, while the ROCE is currently high for RATIONAL (ETR:RAA), we aren't jumping out of our chairs because returns are decreasing.

What is 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. Analysts use this formula to calculate it for RATIONAL:

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

0.30 = €186m ÷ (€761m - €145m) (Based on the trailing twelve months to September 2021).

So, RATIONAL has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 8.8% earned by companies in a similar industry.

View our latest analysis for RATIONAL

roce
XTRA:RAA Return on Capital Employed January 10th 2022

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 Does the ROCE Trend For RATIONAL Tell Us?

In terms of RATIONAL's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 41%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take 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 long term investors must be optimistic going forward because the stock has returned a huge 127% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

RATIONAL could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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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