Investors Met With Slowing Returns on Capital At RGC Resources (NASDAQ:RGCO)

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think RGC Resources (NASDAQ:RGCO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 RGC Resources, this is the formula:

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

0.064 = US$17m ÷ (US$295m - US$27m) (Based on the trailing twelve months to June 2023).

So, RGC Resources has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.9%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for RGC Resources.

What Can We Tell From RGC Resources' ROCE Trend?

There are better returns on capital out there than what we're seeing at RGC Resources. The company has consistently earned 6.4% for the last five years, and the capital employed within the business has risen 45% 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.

In Conclusion...

Long story short, while RGC Resources has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 3 warning signs for RGC Resources you'll probably want to know about.

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.