Yahoo Finance Should You Be Impressed By Renold's (LON:RNO) Returns on Capital?
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Renold (LON:RNO), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Renold is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = UK£11m ÷ (UK£216m - UK£43m) (Based on the trailing twelve months to March 2020).
So, Renold has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.
View our latest analysis for Renold
Above you can see how the current ROCE for Renold compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Renold here for free.
The Trend Of ROCE
On the surface, the trend of ROCE at Renold doesn't inspire confidence. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 6.1%. 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 may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Renold's ROCE
To conclude, we've found that Renold is reinvesting in the business, but returns have been falling. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 81% in the last five years. Therefore based on the analysis done in this article, we don't think Renold has the makings of a multi-bagger.
One more thing: We've identified 5 warning signs with Renold (at least 1 which is a bit concerning) , and understanding these would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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