There Are Reasons To Feel Uneasy About Riba Mundo Tecnología's (BIT:RMT) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Riba Mundo Tecnología (BIT:RMT) 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)?

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 Riba Mundo Tecnología:

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

0.16 = €7.0m ÷ (€97m - €55m) (Based on the trailing twelve months to June 2024).

Therefore, Riba Mundo Tecnología has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 10% it's much better.

View our latest analysis for Riba Mundo Tecnología

Historical performance is a great place to start when researching a stock so above you can see the gauge for Riba Mundo Tecnología's ROCE against it's prior returns. If you'd like to look at how Riba Mundo Tecnología has performed in the past in other metrics, you can view this free graph of Riba Mundo Tecnología's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 40% three years ago, while capital employed has grown 669%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Riba Mundo Tecnología probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Riba Mundo Tecnología has decreased its current liabilities to 56% 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From Riba Mundo Tecnología's ROCE

While returns have fallen for Riba Mundo Tecnología in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 50% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 5 warning signs we've spotted with Riba Mundo Tecnología (including 3 which are a bit concerning) .

While Riba Mundo Tecnología may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.