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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. So on that note, Royal Mail (LON:RMG) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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 Royal Mail is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = UK£1.0b ÷ (UK£10b – UK£2.5b) (Based on the trailing twelve months to September 2021).
So, Royal Mail has an ROCE of 13%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Logistics industry average of 15%.
Check out our latest analysis for Royal Mail
In the above chart we have measured Royal Mail’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Royal Mail.
What Can We Tell From Royal Mail’s ROCE Trend?
Royal Mail’s ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 45% in that same time. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Royal Mail’s ROCE
To sum it up, Royal Mail is collecting higher returns from the same amount of capital, and that’s impressive. Since the stock has only returned 7.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we’d look further into this stock in case it has more traits that could make it multiply in the long term.
On a final note, we found 3 warning signs for Royal Mail (1 shouldn’t be ignored) you should be aware of.
While Royal Mail may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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