RA International Group (LON:RAI) Is Reinvesting At Lower Rates Of Return
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at RA International Group (LON:RAI), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for RA International Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$6.8m ÷ (US$92m - US$9.2m) (Based on the trailing twelve months to June 2021).
Therefore, RA International Group has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Construction industry average of 8.9%.
Check out our latest analysis for RA International Group
Above you can see how the current ROCE for RA International Group 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 RA International Group here for free.
What Does the ROCE Trend For RA International Group Tell Us?
In terms of RA International Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 31%, but since then they've fallen to 8.2%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, RA International Group has done well to pay down its current liabilities to 9.9% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On RA International Group's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for RA International Group have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 46% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
RA International Group does have some risks, we noticed 7 warning signs (and 2 which are significant) we think you should know about.
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.
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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.
