- United Kingdom
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- Machinery
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- AIM:RNO
Renold's (LON:RNO) Returns On Capital Tell Us There Is Reason To Feel Uneasy
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Renold (LON:RNO), we weren't too upbeat about how things were going.
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. The formula for this calculation on Renold is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = UK£4.3m ÷ (UK£195m - UK£40m) (Based on the trailing twelve months to March 2021).
So, Renold has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10%.
View our latest analysis for Renold
Above you can see how the current ROCE for Renold compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Renold Tell Us?
There is reason to be cautious about Renold, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Renold to turn into a multi-bagger.
The Bottom Line
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 20% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing: We've identified 4 warning signs with Renold (at least 2 which are concerning) , and understanding them would certainly be useful.
While Renold 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. 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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About AIM:RNO
Renold
Engages in the manufacture and sale of high precision engineered products and solutions in the United Kingdom, rest of Europe, the United States, Canada, Australasia, China, India, and internationally.
Very undervalued with reasonable growth potential.