Ritamix Global (HKG:1936) Will Be Hoping To Turn Its Returns On Capital Around

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Ritamix Global (HKG:1936) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Ritamix Global is:

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

0.053 = RM8.9m ÷ (RM177m - RM11m) (Based on the trailing twelve months to June 2024).

Thus, Ritamix Global has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 7.3%.

View our latest analysis for Ritamix Global

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ritamix Global's ROCE against it's prior returns. If you'd like to look at how Ritamix Global has performed in the past in other metrics, you can view this free graph of Ritamix Global's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Ritamix Global's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.3% from 30% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Ritamix Global's ROCE

In summary, Ritamix Global is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 48% over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 2 warning signs with Ritamix Global (at least 1 which is concerning) , and understanding them would certainly be useful.

While Ritamix Global 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.