Here's What To Make Of RGC Resources' (NASDAQ:RGCO) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. In light of that, when we looked at RGC Resources (NASDAQ:RGCO) and its ROCE trend, we weren't exactly thrilled.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for RGC Resources, this is the formula:

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

0.063 = US$16m ÷ (US$308m - US$60m) (Based on the trailing twelve months to December 2022).

So, RGC Resources has an ROCE of 6.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

View our latest analysis for RGC Resources

Above you can see how the current ROCE for RGC Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering RGC Resources here for free.

How Are Returns Trending?

In terms of RGC Resources' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 6.3% for the last five years, and the capital employed within the business has risen 39% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 20% of total assets, this reported ROCE would probably be less than6.3% because total capital employed would be higher.The 6.3% ROCE could be even lower if current liabilities weren't 20% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line On RGC Resources' ROCE

Long story short, while RGC Resources has been reinvesting its capital, the returns that it's generating haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last five years. Therefore based on the analysis done in this article, we don't think RGC Resources has the makings of a multi-bagger.

Like most companies, RGC Resources does come with some risks, and we've found 3 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.