Investors Will Want R.E.A. Holdings' (LON:RE.) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at R.E.A. Holdings (LON:RE.) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for R.E.A. Holdings, this is the formula:

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

0.10 = US$48m ÷ (US$591m - US$112m) (Based on the trailing twelve months to December 2021).

Therefore, R.E.A. Holdings has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 9.5%.

See our latest analysis for R.E.A. Holdings

In the above chart we have measured R.E.A. Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for R.E.A. Holdings.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that R.E.A. Holdings has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 10% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

What We Can Learn From R.E.A. Holdings' ROCE

To sum it up, R.E.A. Holdings is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 59% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching R.E.A. Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

While R.E.A. Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.