How Has Rapala VMC (HEL:RAP1V) Allocated Its Capital?

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Rapala VMC (HEL:RAP1V), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Rapala VMC, this is the formula:

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

0.017 = €3.5m ÷ (€317m - €108m) (Based on the trailing twelve months to June 2020).

So, Rapala VMC has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Leisure industry average of 15%.

View our latest analysis for Rapala VMC

In the above chart we have measured Rapala VMC's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Rapala VMC's ROCE Trend?

There is reason to be cautious about Rapala VMC, given the returns are trending downwards. To be more specific, the ROCE was 8.6% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Rapala VMC to turn into a multi-bagger.

Our Take On Rapala VMC's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 6.4% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Rapala VMC (of which 1 makes us a bit uncomfortable!) that you should know about.

While Rapala VMC isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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