If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Robert Half International (NYSE:RHI), it does have a high ROCE right now, but lets see how returns are trending.
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. To calculate this metric for Robert Half International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$345m ÷ (US$2.6b - US$1.0b) (Based on the trailing twelve months to December 2020).
Thus, Robert Half International has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 10%.
Above you can see how the current ROCE for Robert Half International compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Robert Half International's ROCE Trend?
In terms of Robert Half International's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 57%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a separate but related note, it's important to know that Robert Half International has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Robert Half International's ROCE
We're a bit apprehensive about Robert Half International because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 101% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a separate note, we've found 1 warning sign for Robert Half International you'll probably want to know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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