Republic Services (NYSE:RSG) Has Some Way To Go To Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Republic Services (NYSE:RSG) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Republic Services:

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

0.099 = US$2.6b ÷ (US$29b - US$3.0b) (Based on the trailing twelve months to March 2023).

Thus, Republic Services has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 8.5%.

View our latest analysis for Republic Services

Above you can see how the current ROCE for Republic Services 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 Republic Services here for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Republic Services. Over the past five years, ROCE has remained relatively flat at around 9.9% and the business has deployed 40% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Republic Services' ROCE

In conclusion, Republic Services has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 126% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Republic Services does have some risks though, and we've spotted 2 warning signs for Republic Services that you might be interested in.

While Republic Services isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.