R.E.A. Holdings (LON:RE.) Is Experiencing Growth In Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at R.E.A. Holdings (LON:RE.) and its trend of ROCE, we really liked what we saw.

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)

0.052 = US$25m ÷ (US$557m - US$73m) (Based on the trailing twelve months to June 2023).

Thus, R.E.A. Holdings has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Food industry average of 8.8%.

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.

The Trend Of ROCE

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 5.2% 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. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

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

As discussed above, R.E.A. Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Although the company may be facing some issues elsewhere since the stock has plunged 74% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

On a separate note, we've found 3 warning signs for R.E.A. Holdings you'll probably want to know about.

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.