Here's What To Make Of REX American Resources' (NYSE:REX) Decelerating Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 REX American Resources (NYSE:REX) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for REX American Resources:

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

0.097 = US$50m ÷ (US$575m - US$57m) (Based on the trailing twelve months to October 2022).

Therefore, REX American Resources has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 21%.

Check out our latest analysis for REX American Resources

In the above chart we have measured REX American Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering REX American Resources here for free.

What The Trend Of ROCE Can Tell Us

Over the past five years, REX American Resources' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect REX American Resources to be a multi-bagger going forward.

What We Can Learn From REX American Resources' ROCE

We can conclude that in regards to REX American Resources' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 7.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

REX American Resources could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While REX American Resources 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.