Rai Way (BIT:RWAY) Is Aiming To Keep Up Its Impressive Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Rai Way's (BIT:RWAY) trend of ROCE, we really liked 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. The formula for this calculation on Rai Way is:

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

0.34 = €98m ÷ (€393m - €106m) (Based on the trailing twelve months to June 2022).

Thus, Rai Way has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Telecom industry average of 20%.

Our analysis indicates that RWAY is potentially undervalued!

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, you can check out the forecasts from the analysts covering Rai Way here for free.

What Does the ROCE Trend For Rai Way Tell Us?

It's hard not to be impressed by Rai Way's returns on capital. The company has employed 26% more capital in the last five years, and the returns on that capital have remained stable at 34%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Rai Way can keep this up, we'd be very optimistic about its future.

What We Can Learn From Rai Way's ROCE

In summary, we're delighted to see that Rai Way has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And given the stock has only risen 18% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Rai Way is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

Rai Way does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

Rai Way is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.