RealTech (ETR:RTC) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at RealTech (ETR:RTC) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for RealTech, this is the formula:

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

0.095 = €962k ÷ (€12m - €2.2m) (Based on the trailing twelve months to December 2021).

Therefore, RealTech has an ROCE of 9.5%. On its own, that's a low figure but it's around the 11% average generated by the IT industry.

Check out our latest analysis for RealTech

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

The Trend Of ROCE

RealTech has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 9.5%, which is always encouraging. While returns have increased, the amount of capital employed by RealTech has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

One more thing to note, RealTech has decreased current liabilities to 18% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that RealTech has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On RealTech's ROCE

To sum it up, RealTech is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 8.5% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

RealTech does have some risks though, and we've spotted 1 warning sign for RealTech that you might be interested in.

While RealTech 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.