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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at Reynolds Consumer Products' (NASDAQ:REYN) ROCE trend, we were pretty happy with what we saw.
What is 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 Reynolds Consumer Products, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$557m ÷ (US$4.7b - US$455m) (Based on the trailing twelve months to June 2021).
Thus, Reynolds Consumer Products has an ROCE of 13%. In isolation, that's a pretty standard return but against the Household Products industry average of 19%, it's not as good.
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'd like to see what analysts are forecasting going forward, you should check out our free report for Reynolds Consumer Products.
What Does the ROCE Trend For Reynolds Consumer Products Tell Us?
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 13% for the last three years, and the capital employed within the business has risen 31% in that time. 13% is a pretty standard return, and it provides some comfort knowing that Reynolds Consumer Products has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
One more thing to note, even though ROCE has remained relatively flat over the last three years, the reduction in current liabilities to 9.7% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
To sum it up, Reynolds Consumer Products has simply been reinvesting capital steadily, at those decent rates of return. However, despite the favorable fundamentals, the stock has fallen 11% over the last year, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
One final note, you should learn about the 2 warning signs we've spotted with Reynolds Consumer Products (including 1 which makes us a bit uncomfortable) .
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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