Under The Bonnet, Rai Way's (BIT:RWAY) Returns Look Impressive

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Rai Way (BIT:RWAY) looks great, so lets see what the trend can tell us.

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

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. The formula for this calculation on Rai Way is:

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

0.42 = €91m ÷ (€328m - €111m) (Based on the trailing twelve months to September 2020).

So, Rai Way has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Media industry average of 8.0%.

See our latest analysis for Rai Way

Above you can see how the current ROCE for Rai Way compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Rai Way.

So How Is Rai Way's ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Rai Way. The figures show that over the last five years, returns on capital have grown by 104%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 23% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Rai Way may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

In the end, Rai Way has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 20% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 1 warning sign with Rai Way and understanding this should be part of your investment process.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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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