RHI Magnesita (LON:RHIM) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at RHI Magnesita's (LON:RHIM) ROCE trend, we were pretty happy with 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 RHI Magnesita is:

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

0.11 = €227m ÷ (€3.2b - €1.0b) (Based on the trailing twelve months to June 2021).

Therefore, RHI Magnesita has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

Check out our latest analysis for RHI Magnesita

In the above chart we have measured RHI Magnesita'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 RHI Magnesita.

What Does the ROCE Trend For RHI Magnesita Tell Us?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 65% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that RHI Magnesita has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

What We Can Learn From RHI Magnesita's ROCE

In the end, RHI Magnesita has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 15% over the last three years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for RHI Magnesita (of which 1 doesn't sit too well with us!) that you should know about.

While RHI Magnesita 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.
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