S.C. Ropharma (BVB:RPH) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, S.C. Ropharma (BVB:RPH) looks quite promising in regards to its trends of return on capital.

What Is 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. To calculate this metric for S.C. Ropharma, this is the formula:

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

0.058 = RON21m ÷ (RON885m - RON520m) (Based on the trailing twelve months to June 2024).

So, S.C. Ropharma has an ROCE of 5.8%. Even though it's in line with the industry average of 5.8%, it's still a low return by itself.

View our latest analysis for S.C. Ropharma

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

What Does the ROCE Trend For S.C. Ropharma Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.8%. The amount of capital employed has increased too, by 52%. So we're very much inspired by what we're seeing at S.C. Ropharma thanks to its ability to profitably reinvest capital.

On a side note, S.C. Ropharma's current liabilities are still rather high at 59% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, S.C. Ropharma has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 44% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 3 warning signs we've spotted with S.C. Ropharma (including 1 which is a bit unpleasant) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.