Here's What To Make Of Regenbogen's (FRA:RGB) Decelerating Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Regenbogen (FRA:RGB) and its ROCE trend, we weren't exactly thrilled.

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 Regenbogen:

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

0.065 = €2.5m ÷ (€39m - €252k) (Based on the trailing twelve months to June 2023).

So, Regenbogen has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 4.4% generated by the Hospitality industry, it's much better.

See our latest analysis for Regenbogen

Historical performance is a great place to start when researching a stock so above you can see the gauge for Regenbogen's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Regenbogen.

How Are Returns Trending?

The returns on capital haven't changed much for Regenbogen in recent years. The company has employed 73% more capital in the last five years, and the returns on that capital have remained stable at 6.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

In conclusion, Regenbogen has been investing more capital into the business, but returns on that capital haven't increased. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing: We've identified 5 warning signs with Regenbogen (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Regenbogen may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.