Investors Met With Slowing Returns on Capital At Reynolds Consumer Products (NASDAQ:REYN)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Reynolds Consumer Products (NASDAQ:REYN), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Reynolds Consumer Products is:

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

0.13 = US$550m ÷ (US$4.9b - US$517m) (Based on the trailing twelve months to March 2024).

So, Reynolds Consumer Products has an ROCE of 13%. In isolation, that's a pretty standard return but against the Household Products industry average of 20%, it's not as good.

See our latest analysis for Reynolds Consumer Products

Above you can see how the current ROCE for Reynolds Consumer Products 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 analyst report for Reynolds Consumer Products .

What Does the ROCE Trend For Reynolds Consumer Products Tell Us?

There hasn't been much to report for Reynolds Consumer Products' returns and its level of capital employed because both metrics have been steady for the past five years. 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. So unless we see a substantial change at Reynolds Consumer Products in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why Reynolds Consumer Products is paying out 48% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Key Takeaway

In a nutshell, Reynolds Consumer Products has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 4.6% to shareholders over the last three years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, Reynolds Consumer Products does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.