Is Ralco Agencies (TLV:RLCO) Going To Multiply In Value?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Ralco Agencies' (TLV:RLCO) trend of ROCE, we really liked what we saw.

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 Ralco Agencies, this is the formula:

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

0.40 = ₪26m ÷ (₪129m - ₪63m) (Based on the trailing twelve months to June 2020).

Thus, Ralco Agencies has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Retail Distributors industry average of 5.3%.

Check out our latest analysis for Ralco Agencies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ralco Agencies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Ralco Agencies, check out these free graphs here.

The Trend Of ROCE

It's hard not to be impressed by Ralco Agencies' returns on capital. The company has employed 25% more capital in the last five years, and the returns on that capital have remained stable at 40%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 49% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

What We Can Learn From Ralco Agencies' ROCE

Ralco Agencies has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 172% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 2 warning signs facing Ralco Agencies that you might find interesting.

Ralco Agencies is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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