The Returns On Capital At Racing Force (BIT:RFG) Don't Inspire Confidence

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Racing Force (BIT:RFG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Racing Force:

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

0.12 = €7.1m ÷ (€78m - €19m) (Based on the trailing twelve months to June 2023).

So, Racing Force has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Leisure industry average of 14%.

See our latest analysis for Racing Force

Above you can see how the current ROCE for Racing Force compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Racing Force for free.

What Can We Tell From Racing Force's ROCE Trend?

In terms of Racing Force's historical ROCE movements, the trend isn't fantastic. Over the last two years, returns on capital have decreased to 12% from 24% two 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.

On a related note, Racing Force has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Racing Force's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Racing Force is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 17% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 4 warning signs with Racing Force (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.