Radici Pietro Industries & Brands (BIT:RAD) Is Finding It Tricky To Allocate Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Radici Pietro Industries & Brands (BIT:RAD), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Radici Pietro Industries & Brands, this is the formula:

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

0.0092 = €414k ÷ (€72m - €27m) (Based on the trailing twelve months to June 2021).

Thus, Radici Pietro Industries & Brands has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 13%.

See our latest analysis for Radici Pietro Industries & Brands

In the above chart we have measured Radici Pietro Industries & Brands' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Radici Pietro Industries & Brands. Unfortunately the returns on capital have diminished from the 5.3% that they were earning three years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last three years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Radici Pietro Industries & Brands becoming one if things continue as they have.

What We Can Learn From Radici Pietro Industries & Brands' ROCE

In summary, it's unfortunate that Radici Pietro Industries & Brands is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last year have experienced a 31% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Radici Pietro Industries & Brands (including 1 which doesn't sit too well with us) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.