Investors Will Want Ritchie Bros. Auctioneers' (NYSE:RBA) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. 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. So on that note, Ritchie Bros. Auctioneers (NYSE:RBA) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Ritchie Bros. Auctioneers, this is the formula:

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

0.14 = US$297m ÷ (US$2.9b - US$793m) (Based on the trailing twelve months to June 2022).

Therefore, Ritchie Bros. Auctioneers has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Commercial Services industry.

View our latest analysis for Ritchie Bros. Auctioneers

In the above chart we have measured Ritchie Bros. Auctioneers' 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 Ritchie Bros. Auctioneers.

What Does the ROCE Trend For Ritchie Bros. Auctioneers Tell Us?

Ritchie Bros. Auctioneers is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 31% more capital is being employed now too. So we're very much inspired by what we're seeing at Ritchie Bros. Auctioneers thanks to its ability to profitably reinvest capital.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Ritchie Bros. Auctioneers has. Since the stock has returned a staggering 146% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Ritchie Bros. Auctioneers can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Ritchie Bros. Auctioneers you'll probably want to know about.

While Ritchie Bros. Auctioneers may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.