Be Wary Of Rimbaco Group Global (HKG:1953) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Rimbaco Group Global (HKG:1953) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Rimbaco Group Global, this is the formula:

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

0.065 = RM10m ÷ (RM237m - RM81m) (Based on the trailing twelve months to October 2020).

Therefore, Rimbaco Group Global has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.4%.

See our latest analysis for Rimbaco Group Global

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Rimbaco Group Global has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Rimbaco Group Global's ROCE Trend?

When we looked at the ROCE trend at Rimbaco Group Global, we didn't gain much confidence. To be more specific, ROCE has fallen from 45% over the last three years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Rimbaco Group Global has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Rimbaco Group Global have fallen, meanwhile the business is employing more capital than it was three years ago. We expect this has contributed to the stock plummeting 73% during the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Rimbaco Group Global we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

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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