Riot Blockchain's (NASDAQ:RIOT) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So when we looked at Riot Blockchain (NASDAQ:RIOT) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

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 Riot Blockchain is:

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

0.005 = US$1.9m ÷ (US$376m - US$7.4m) (Based on the trailing twelve months to March 2021).

So, Riot Blockchain has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.

View our latest analysis for Riot Blockchain

Above you can see how the current ROCE for Riot Blockchain 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 Riot Blockchain.

How Are Returns Trending?

The fact that Riot Blockchain is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 0.5% on its capital. In addition to that, Riot Blockchain is employing 1,969% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Riot Blockchain's ROCE

Long story short, we're delighted to see that Riot Blockchain's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 740% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Riot Blockchain can keep these trends up, it could have a bright future ahead.

Riot Blockchain does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Riot Blockchain 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. 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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