Returns On Capital Signal Tricky Times Ahead For RCL Foods (JSE:RCL)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at RCL Foods (JSE:RCL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for RCL Foods, this is the formula:

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

0.037 = R645m ÷ (R25b - R7.7b) (Based on the trailing twelve months to July 2023).

Therefore, RCL Foods has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Food industry average of 9.6%.

View our latest analysis for RCL Foods

In the above chart we have measured RCL Foods' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of RCL Foods' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.1%, but since then they've fallen to 3.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From RCL Foods' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for RCL Foods. However, despite the promising trends, the stock has fallen 32% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing, we've spotted 1 warning sign facing RCL Foods that you might find interesting.

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

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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.