S.C. Ropharma (BVB:RPH) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. However, after investigating S.C. Ropharma (BVB:RPH), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for S.C. Ropharma:

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

0.027 = RON7.6m ÷ (RON629m - RON345m) (Based on the trailing twelve months to June 2020).

So, S.C. Ropharma has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 8.6%.

Check out 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 past earnings, revenue and cash flow.

What Can We Tell From S.C. Ropharma's ROCE Trend?

When we looked at the ROCE trend at S.C. Ropharma, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.7% from 7.8% five years ago. However it looks like S.C. Ropharma might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, S.C. Ropharma has a high ratio of current liabilities to total assets of 55%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From S.C. Ropharma's ROCE

In summary, S.C. Ropharma is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know more about S.C. Ropharma, we've spotted 6 warning signs, and 3 of them are a bit unpleasant.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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