Yahoo Finance Should You Be Worried About Robinson's (LON:RBN) Returns On Capital?
Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Robinson (LON:RBN), we weren't too upbeat about how things were going.
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 Robinson, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.089 = UK£2.5m ÷ (UK£40m - UK£12m) (Based on the trailing twelve months to June 2020).
Therefore, Robinson has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Packaging industry average of 12%.
View our latest analysis for Robinson
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Robinson has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Robinson's ROCE Trending?
There is reason to be cautious about Robinson, given the returns are trending downwards. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Robinson to turn into a multi-bagger.
Our Take On Robinson's ROCE
In summary, it's unfortunate that Robinson is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 2.0% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a final note, we've found 3 warning signs for Robinson 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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