What Should Investors Know About Rafako SA.’s (WSE:RFK) Return On Capital?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Rafako SA. (WSE:RFK).

Purchasing Rafako gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to RFK’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Rafako is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

View our latest analysis for Rafako

Calculating Return On Capital Employed for RFK

Choosing to invest in Rafako comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Rafako is good at growing investor capital. RFK’s ROCE is calculated below:

ROCE Calculation for RFK

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = ZŁ44.21M ÷ (ZŁ1.28B – ZŁ603.10M) = 6.53%

RFK’s 6.53% ROCE means that for every PLN100 you invest, the company creates PLN6.5. This makes Rafako unattractive when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but not to the extent investors should be aiming for.

WSE:RFK Last Perf May 27th 18
WSE:RFK Last Perf May 27th 18

A deeper look

The underperforming ROCE is not ideal for Rafako investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, RFK’s ROCE may increase, in which case your portfolio could benefit from holding the company. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, RFK’s ROCE was 9.12%, which means the company’s capital returns have worsened. Conversely, the movement in the earnings variable shows a jump from ZŁ33.29M to ZŁ44.21M albeit capital employed rose by a relatively larger volume in response to an increase in total assets and a smaller reliance on current liabilities (less borrowing to fund operations) , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.

Next Steps

Rafako’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like the management team. Rafako’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Rafako’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.