There Are Reasons To Feel Uneasy About Raketech Group Holding's (STO:RAKE) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Raketech Group Holding (STO:RAKE), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Raketech Group Holding:

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

0.082 = €6.6m ÷ (€91m - €10m) (Based on the trailing twelve months to December 2020).

Therefore, Raketech Group Holding has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 16%.

See our latest analysis for Raketech Group Holding

Above you can see how the current ROCE for Raketech Group Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Raketech Group Holding here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Raketech Group Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.2% from 39% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Raketech Group Holding has done well to pay down its current liabilities to 11% of total assets. Considering it used to be 73%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Raketech Group Holding's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Raketech Group Holding is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 201% return over the last year, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 3 warning signs for Raketech Group Holding that we think you should be aware of.

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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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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