Yahoo Finance What Do The Returns At RPMGlobal Holdings (ASX:RUL) Mean Going Forward?
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at RPMGlobal Holdings (ASX:RUL) so let's look a bit deeper.
Understanding 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. To calculate this metric for RPMGlobal Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = AU$4.6m ÷ (AU$90m - AU$25m) (Based on the trailing twelve months to December 2019).
Thus, RPMGlobal Holdings has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Software industry average of 16%.
View our latest analysis for RPMGlobal Holdings
In the above chart we have a measured RPMGlobal Holdings' 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.
What The Trend Of ROCE Can Tell Us
RPMGlobal Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 7.0% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
Our Take On RPMGlobal Holdings' ROCE
In summary, we're delighted to see that RPMGlobal Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 71% awarded to those who held the stock over the last five years, you could argue that these trends are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if RPMGlobal Holdings can keep these trends up, it could have a bright future ahead.
On a final note, we've found 1 warning sign for RPMGlobal Holdings that we think you should be aware of.
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.
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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