R.E.A. Holdings (LON:RE.) Is Doing The Right Things To Multiply Its Share Price

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)?

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. The formula for this calculation on R.E.A. Holdings is:

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

0.054 = US$25m ÷ (US$566m - US$98m) (Based on the trailing twelve months to June 2021).

Therefore, R.E.A. Holdings has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.

Check out our latest analysis for R.E.A. Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for R.E.A. Holdings' ROCE against it's prior returns. If you're interested in investigating R.E.A. Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For R.E.A. Holdings Tell Us?

R.E.A. Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 5.4% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Bottom Line On 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. Given the stock has declined 65% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 2 warning signs for R.E.A. Holdings you'll probably want to 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.

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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.