Here's What To Make Of RCS MediaGroup's (BIT:RCS) Decelerating Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at RCS MediaGroup (BIT:RCS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on RCS MediaGroup is:

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

0.098 = €64m ÷ (€969m - €316m) (Based on the trailing twelve months to March 2021).

Therefore, RCS MediaGroup has an ROCE of 9.8%. On its own, that's a low figure but it's around the 9.5% average generated by the Media industry.

See our latest analysis for RCS MediaGroup

Above you can see how the current ROCE for RCS MediaGroup 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 RCS MediaGroup here for free.

How Are Returns Trending?

In terms of RCS MediaGroup's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.8% for the last five years, and the capital employed within the business has risen 154% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 33% 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.

Our Take On RCS MediaGroup's ROCE

As we've seen above, RCS MediaGroup's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching RCS MediaGroup, you might be interested to know about the 2 warning signs that our analysis has discovered.

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. 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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