Returns On Capital Signal Tricky Times Ahead For RPA Holdings (TSE:6572)

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at RPA Holdings (TSE:6572) 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)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for RPA Holdings:

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

0.034 = JP¥456m ÷ (JP¥19b - JP¥5.3b) (Based on the trailing twelve months to November 2023).

Thus, RPA Holdings has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.5%.

See our latest analysis for RPA Holdings

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

How Are Returns Trending?

When we looked at the ROCE trend at RPA Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 3.4%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On RPA Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for RPA Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. We expect this has contributed to the stock plummeting 87% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, RPA Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.

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.