RCM Technologies (NASDAQ:RCMT) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within RCM Technologies (NASDAQ:RCMT), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for RCM Technologies:

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

0.025 = US$1.2m ÷ (US$78m - US$28m) (Based on the trailing twelve months to April 2021).

Thus, RCM Technologies has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 9.7%.

Check out our latest analysis for RCM Technologies

In the above chart we have measured RCM Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for RCM Technologies.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about RCM Technologies, given the returns are trending downwards. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect RCM Technologies to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that RCM Technologies is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 23% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for RCM Technologies (1 is a bit unpleasant) you should be aware of.

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