Roof Renovation's (WSE:RRH) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 looked at Roof Renovation (WSE:RRH) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Roof Renovation:

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

0.12 = zł8.6m ÷ (zł81m - zł12m) (Based on the trailing twelve months to June 2023).

Thus, Roof Renovation has an ROCE of 12%. In isolation, that's a pretty standard return but against the Media industry average of 21%, it's not as good.

View our latest analysis for Roof Renovation

Historical performance is a great place to start when researching a stock so above you can see the gauge for Roof Renovation's ROCE against it's prior returns. If you're interested in investigating Roof Renovation's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Roof Renovation's ROCE Trend?

The fact that Roof Renovation is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 12% which is a sight for sore eyes. Not only that, but the company is utilizing 5,880% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

Long story short, we're delighted to see that Roof Renovation's reinvestment activities have paid off and the company is now profitable. Since the stock has only returned 13% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Roof Renovation does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are a bit unpleasant...

While Roof Renovation isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.