Returns At Royal Mail (LON:RMG) Appear To Be Weighed Down

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Royal Mail (LON:RMG) looks decent, right now, so lets see what the trend of returns can tell us.

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. The formula for this calculation on Royal Mail is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.10 = UK£821m ÷ (UK£11b – UK£2.7b) (Based on the trailing twelve months to March 2022).

Therefore, Royal Mail has an ROCE of 10%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Logistics industry average of 13%.

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?

While the returns on capital are good, they haven’t moved much. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 26% in that time. 10% is a pretty standard return, and it provides some comfort knowing that Royal Mail has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion…

The main thing to remember is that Royal Mail has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 19% over the last five years, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it’s a prime investment.

If you want to know some of the risks facing Royal Mail we’ve found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.