Here's What To Make Of Rába Jármûipari Holding Nyrt's (BUSE:RABA) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Rába Jármûipari Holding Nyrt (BUSE:RABA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Rába Jármûipari Holding Nyrt:

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

0.014 = Ft380m ÷ (Ft42b - Ft15b) (Based on the trailing twelve months to December 2020).

So, Rába Jármûipari Holding Nyrt has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.5%.

See our latest analysis for Rába Jármûipari Holding Nyrt

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

How Are Returns Trending?

When we looked at the ROCE trend at Rába Jármûipari Holding Nyrt, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 1.4%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Rába Jármûipari Holding Nyrt because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 8.6% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Rába Jármûipari Holding Nyrt does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...

While Rába Jármûipari Holding Nyrt isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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