There Are Reasons To Feel Uneasy About Reynolds Consumer Products' (NASDAQ:REYN) Returns On Capital

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Reynolds Consumer Products (NASDAQ:REYN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Reynolds Consumer Products is:

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

0.088 = US$386m ÷ (US$4.9b - US$490m) (Based on the trailing twelve months to March 2023).

Thus, Reynolds Consumer Products has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Household Products industry average of 14%.

Check out our latest analysis for Reynolds Consumer Products

In the above chart we have measured Reynolds Consumer Products' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Reynolds Consumer Products.

So How Is Reynolds Consumer Products' ROCE Trending?

In terms of Reynolds Consumer Products' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.8% from 23% five years ago. However it looks like Reynolds Consumer Products might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Reynolds Consumer Products has done well to pay down its current liabilities to 10% of total assets. Considering it used to be 62%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Reynolds Consumer Products' ROCE

Bringing it all together, while we're somewhat encouraged by Reynolds Consumer Products' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last three years has been flat. Therefore based on the analysis done in this article, we don't think Reynolds Consumer Products has the makings of a multi-bagger.

Reynolds Consumer Products does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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

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

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.