Should You Be Impressed By S.C. Ropharma's (BVB:RPH) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at S.C. Ropharma (BVB:RPH), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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)

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

Thus, S.C. Ropharma has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.3%.

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're interested in investigating S.C. Ropharma's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of S.C. Ropharma's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.7% from 7.8% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a separate but related note, it's important to know that S.C. Ropharma has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. 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

To conclude, we've found that S.C. Ropharma is reinvesting in the business, but returns have been falling. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

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

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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