The Returns At Roche Bobois (EPA:RBO) Provide Us With Signs Of What's To Come

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Roche Bobois (EPA:RBO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Roche Bobois is:

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

0.061 = €10m ÷ (€341m - €172m) (Based on the trailing twelve months to June 2020).

Thus, Roche Bobois has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 7.9%.

View our latest analysis for Roche Bobois

Above you can see how the current ROCE for Roche Bobois compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Roche Bobois, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last four years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Roche Bobois has a high ratio of current liabilities to total assets of 50%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To conclude, we've found that Roche Bobois is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 3.7% to shareholders over the last year. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you'd like to know about the risks facing Roche Bobois, we've discovered 2 warning signs that you should be aware of.

While Roche Bobois 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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