Rallye (EPA:RAL) Is Doing The Right Things To Multiply Its Share Price

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Rallye's (EPA:RAL) returns on capital, so let's have a look.

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 Rallye:

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

0.062 = €1.2b ÷ (€32b - €12b) (Based on the trailing twelve months to June 2021).

So, Rallye has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 12%.

View our latest analysis for Rallye

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Rallye, check out these free graphs here.

What Can We Tell From Rallye's ROCE Trend?

We're pretty happy with how the ROCE has been trending at Rallye. The data shows that returns on capital have increased by 141% over the trailing five years. The company is now earning €0.06 per dollar of capital employed. In regards to capital employed, Rallye appears to been achieving more with less, since the business is using 23% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line

In a nutshell, we're pleased to see that Rallye has been able to generate higher returns from less capital. Given the stock has declined 63% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 3 warning signs for Rallye (1 is a bit concerning) you should be aware of.

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

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.

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