Yahoo Finance Investors Could Be Concerned With Richelieu Hardware's (TSE:RCH) Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 investigating Richelieu Hardware (TSE:RCH), we don't think it's current trends fit the mold of a multi-bagger.
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 Richelieu Hardware, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CA$158m ÷ (CA$1.3b - CA$234m) (Based on the trailing twelve months to February 2024).
Thus, Richelieu Hardware has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.
See our latest analysis for Richelieu Hardware
Above you can see how the current ROCE for Richelieu Hardware 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 analyst report for Richelieu Hardware .
What Can We Tell From Richelieu Hardware's ROCE Trend?
On the surface, the trend of ROCE at Richelieu Hardware doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 14%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
To conclude, we've found that Richelieu Hardware is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 101% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Like most companies, Richelieu Hardware does come with some risks, and we've found 1 warning sign that you should be aware of.
While Richelieu Hardware 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.
