Slowing Rates Of Return At Rengo (TSE:3941) Leave Little Room For Excitement

There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Rengo (TSE:3941) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Rengo, this is the formula:

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

0.058 = JP¥45b ÷ (JP¥1.2t - JP¥387b) (Based on the trailing twelve months to December 2023).

Therefore, Rengo has an ROCE of 5.8%. On its own, that's a low figure but it's around the 5.1% average generated by the Packaging industry.

Check out our latest analysis for Rengo

Above you can see how the current ROCE for Rengo 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 analyst report for Rengo .

What The Trend Of ROCE Can Tell Us

In terms of Rengo's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 5.8% for the last five years, and the capital employed within the business has risen 63% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, Rengo's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Rengo we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.