Investors Could Be Concerned With Revolution Bars Group's (LON:RBG) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Revolution Bars Group (LON:RBG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Revolution Bars Group:

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

0.086 = UK£8.0m ÷ (UK£130m - UK£37m) (Based on the trailing twelve months to July 2022).

So, Revolution Bars Group has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.3% generated by the Hospitality industry, it's much better.

See our latest analysis for Revolution Bars Group

In the above chart we have measured Revolution Bars 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 Revolution Bars Group here for free.

What Can We Tell From Revolution Bars Group's ROCE Trend?

On the surface, the trend of ROCE at Revolution Bars Group doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. 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.

Our Take On Revolution Bars Group's ROCE

While returns have fallen for Revolution Bars Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 97% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

Revolution Bars Group does have some risks, we noticed 6 warning signs (and 3 which can't be ignored) we think you should know about.

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.

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.