Returns On Capital Are Showing Encouraging Signs At Rallye (EPA:RAL)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Rallye (EPA:RAL) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Rallye, this is the formula:

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

0.068 = €1.4b ÷ (€34b - €13b) (Based on the trailing twelve months to June 2022).

So, Rallye has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 12%.

See our latest analysis for Rallye

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rallye's ROCE against it's prior returns. If you'd like to look at how Rallye has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Rallye's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 38% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Rallye's ROCE

To sum it up, Rallye is collecting higher returns from the same amount of capital, and that's impressive. However the stock is down a substantial 75% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you'd like to know about the risks facing Rallye, we've discovered 1 warning sign that you should be aware of.

While Rallye 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.