The Returns On Capital At RÁBA Jármuipari Holding Nyrt (BUSE:RABA) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think RÁBA Jármuipari Holding Nyrt (BUSE:RABA) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for RÁBA Jármuipari Holding Nyrt, this is the formula:

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

0.058 = Ft2.4b ÷ (Ft62b - Ft21b) (Based on the trailing twelve months to June 2023).

So, RÁBA Jármuipari Holding Nyrt has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.

View our latest analysis for RÁBA Jármuipari 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'd like to look at how RÁBA Jármuipari Holding Nyrt has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at RÁBA Jármuipari Holding Nyrt, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.8% from 8.2% 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On RÁBA Jármuipari Holding Nyrt's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that RÁBA Jármuipari Holding Nyrt is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 20% 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 Jármuipari Holding Nyrt (2 are potentially serious) you should be aware of.

While RÁBA Jármuipari 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.