We Like These Underlying Return On Capital Trends At Rougier (EPA:ALRGR)

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. Speaking of which, we noticed some great changes in Rougier's (EPA:ALRGR) returns on capital, so let's have a look.

What Is 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 Rougier, this is the formula:

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

0.15 = €6.8m ÷ (€83m - €37m) (Based on the trailing twelve months to June 2024).

Thus, Rougier has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 6.1% it's much better.

Check out our latest analysis for Rougier

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

What Does the ROCE Trend For Rougier Tell Us?

We're delighted to see that Rougier is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 15% which is a sight for sore eyes. In addition to that, Rougier is employing 97% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 45%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Rougier's ROCE

Overall, Rougier gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a solid 21% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Rougier does come with some risks, and we've found 2 warning signs that you should be aware of.

While Rougier 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.