Return Trends At Reply (BIT:REY) Aren't Appealing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. That's why when we briefly looked at Reply's (BIT:REY) ROCE trend, we were pretty happy with what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Reply, this is the formula:

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

0.19 = €190m ÷ (€1.5b - €500m) (Based on the trailing twelve months to June 2021).

Thus, Reply has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the IT industry.

View our latest analysis for Reply

Above you can see how the current ROCE for Reply compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Reply's ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 130% more capital in the last five years, and the returns on that capital have remained stable at 19%. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

In the end, Reply has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 407% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 1 warning sign facing Reply that you might find interesting.

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.