Riber (EPA:ALRIB) Shareholders Will Want The ROCE Trajectory To Continue

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Riber (EPA:ALRIB) so let's look a bit deeper.

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 Riber, this is the formula:

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

0.019 = €469k ÷ (€41m - €16m) (Based on the trailing twelve months to June 2020).

Therefore, Riber has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 5.5%.

Check out our latest analysis for Riber

Above you can see how the current ROCE for Riber compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Riber here for free.

So How Is Riber's ROCE Trending?

We're delighted to see that Riber 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 1.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Riber is utilizing 34% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 39% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

Long story short, we're delighted to see that Riber's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 110% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Riber can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Riber and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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