Some Investors May Be Worried About Rába Jármûipari Holding Nyrt's (BUSE:RABA) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Rába Jármûipari Holding Nyrt (BUSE:RABA) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.022 = Ft808m ÷ (Ft59b - Ft23b) (Based on the trailing twelve months to September 2022).

Therefore, Rába Jármûipari Holding Nyrt has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.

See our latest analysis for Rába Jármûipari Holding Nyrt

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 want to delve into the historical earnings, revenue and cash flow of Rába Jármûipari Holding Nyrt, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Rába Jármûipari Holding Nyrt, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.2% from 11% five years ago. 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Rába Jármûipari Holding Nyrt is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 15% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we found 3 warning signs for Rába Jármûipari Holding Nyrt (2 are significant) you should be aware of.

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. 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.