Robinson (LON:RBN) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Although, when we looked at Robinson (LON:RBN), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Robinson:

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

0.0077 = UK£272k ÷ (UK£51m - UK£16m) (Based on the trailing twelve months to June 2021).

Thus, Robinson has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 11%.

Check out our latest analysis for Robinson

In the above chart we have measured Robinson's 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 Robinson.

So How Is Robinson's ROCE Trending?

On the surface, the trend of ROCE at Robinson doesn't inspire confidence. To be more specific, ROCE has fallen from 8.3% 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.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Robinson is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 6.8% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Robinson does have some risks, we noticed 5 warning signs (and 1 which is a bit concerning) we think you should know about.

While Robinson 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.

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.

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