Capital Allocation Trends At RA International Group (LON:RAI) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating RA International Group (LON:RAI), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for RA International Group, this is the formula:

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

0.13 = US$10m ÷ (US$90m - US$7.7m) (Based on the trailing twelve months to December 2020).

Therefore, RA International Group has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Construction industry average of 12%.

Check out our latest analysis for RA International Group

Above you can see how the current ROCE for RA International Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for RA International Group.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at RA International Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. However it looks like RA International Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a related note, RA International Group has decreased its current liabilities to 8.5% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

To conclude, we've found that RA International Group is reinvesting in the business, but returns have been falling. Since the stock has declined 20% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think RA International Group has the makings of a multi-bagger.

Like most companies, RA International Group does come with some risks, and we've found 3 warning signs that you should be aware of.

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

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This article by Simply Wall St is general in nature. 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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