Stock Analysis

Reditus Sociedade Gestora de Participações Sociais (ELI:RED) Is Looking To Continue Growing Its Returns On Capital

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ENXTLS:RED
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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Reditus Sociedade Gestora de Participações Sociais (ELI:RED) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Reditus Sociedade Gestora de Participações Sociais, this is the formula:

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

0.018 = €1.2m ÷ (€161m - €97m) (Based on the trailing twelve months to June 2021).

Therefore, Reditus Sociedade Gestora de Participações Sociais has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.

See our latest analysis for Reditus Sociedade Gestora de Participações Sociais

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ENXTLS:RED Return on Capital Employed September 30th 2022

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

So How Is Reditus Sociedade Gestora de Participações Sociais' ROCE Trending?

While the ROCE is still rather low for Reditus Sociedade Gestora de Participações Sociais, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last five years have risen by 88%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Reditus Sociedade Gestora de Participações Sociais appears to been achieving more with less, since the business is using 52% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 60% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Reditus Sociedade Gestora de Participações Sociais' ROCE

In the end, Reditus Sociedade Gestora de Participações Sociais has proven it's capital allocation skills are good with those higher returns from less amount of capital. However the stock is down a substantial 92% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One more thing, we've spotted 4 warning signs facing Reditus Sociedade Gestora de Participações Sociais that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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