Some Investors May Be Worried About RTC Group's (LON:RTC) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating RTC Group (LON:RTC), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for RTC Group:

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

0.13 = UK£1.2m ÷ (UK£20m - UK£11m) (Based on the trailing twelve months to June 2023).

Therefore, RTC Group has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Professional Services industry average of 15%.

See our latest analysis for RTC Group

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at RTC Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 32% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, RTC Group has decreased its current liabilities to 54% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 54% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for RTC Group. These growth trends haven't led to growth returns though, since the stock has fallen 22% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 4 warning signs for RTC Group (3 don't sit too well with us) you should be aware of.

While RTC 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. 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.