Here's What To Make Of RCI Hospitality Holdings' (NASDAQ:RICK) Decelerating Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over RCI Hospitality Holdings' (NASDAQ:RICK) trend of ROCE, we liked what we saw.

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 RCI Hospitality Holdings:

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

0.11 = US$60m ÷ (US$610m - US$56m) (Based on the trailing twelve months to March 2024).

Thus, RCI Hospitality Holdings has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

See our latest analysis for RCI Hospitality Holdings

Above you can see how the current ROCE for RCI Hospitality Holdings 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 RCI Hospitality Holdings for free.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 69% in that time. 11% is a pretty standard return, and it provides some comfort knowing that RCI Hospitality Holdings has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From RCI Hospitality Holdings' ROCE

The main thing to remember is that RCI Hospitality Holdings has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 168% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

RCI Hospitality Holdings does have some risks though, and we've spotted 3 warning signs for RCI Hospitality Holdings that you might be interested in.

While RCI Hospitality Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com