Investors Could Be Concerned With Rana Gruber's (OB:RANA) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Rana Gruber (OB:RANA), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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Understanding 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 Rana Gruber:

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

0.29 = kr350m ÷ (kr1.7b - kr481m) (Based on the trailing twelve months to December 2024).

Therefore, Rana Gruber has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 9.0% earned by companies in a similar industry.

See our latest analysis for Rana Gruber

In the above chart we have measured Rana Gruber's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Rana Gruber .

What Does the ROCE Trend For Rana Gruber Tell Us?

When we looked at the ROCE trend at Rana Gruber, we didn't gain much confidence. Historically returns on capital were even higher at 41%, but they have dropped over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Rana Gruber's ROCE

In summary, we're somewhat concerned by Rana Gruber's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 138% over the last three years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 2 warning signs with Rana Gruber (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

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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.