Returns On Capital At Ridley (ASX:RIC) Have Hit The Brakes

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Ridley's (ASX:RIC) ROCE trend, we were pretty happy with what we saw.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Ridley is:

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

0.10 = AU$47m ÷ (AU$632m - AU$183m) (Based on the trailing twelve months to December 2020).

So, Ridley has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Food industry.

Check out our latest analysis for Ridley

roce

Above you can see how the current ROCE for Ridley 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 Ridley.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 35% in that time. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Ridley's ROCE

To sum it up, Ridley has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 6.5% over the last five years for shareholders who have owned the stock in this period. So to determine if Ridley is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

One more thing to note, we've identified 5 warning signs with Ridley and understanding these should be part of your investment process.

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

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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