Here's What's Concerning About RPS Group's (LON:RPS) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into RPS Group (LON:RPS), we weren't too upbeat about how things were going.

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. The formula for this calculation on RPS Group is:

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

0.043 = UK£17m ÷ (UK£585m - UK£191m) (Based on the trailing twelve months to June 2021).

Thus, RPS Group has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 11%.

See our latest analysis for RPS Group

In the above chart we have measured RPS Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering RPS Group here for free.

What Does the ROCE Trend For RPS Group Tell Us?

We aren't inspired by the trend, given ROCE has reduced by 29% over the last five years and RPS Group is applying -25% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 33%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

In summary, it's unfortunate that RPS Group is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 45% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for RPS Group that we think you should be aware of.

While RPS 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.