Returns On Capital At Retailors (TLV:RTLS) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Retailors (TLV:RTLS) looks decent, right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Retailors:

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

0.10 = ₪179m ÷ (₪2.3b - ₪510m) (Based on the trailing twelve months to September 2022).

Therefore, Retailors has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.

See our latest analysis for Retailors

In the above chart we have measured Retailors' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Retailors here for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. Over the past two years, ROCE has remained relatively flat at around 10% and the business has deployed 196% more capital into its operations. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Retailors has done well to reduce current liabilities to 23% of total assets over the last two years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Retailors' ROCE

In the end, Retailors has proven its ability to adequately reinvest capital at good rates of return. Yet over the last year the stock has declined 36%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Retailors could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.