Related Articles
If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s 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. Having said that, from a first glance at Royal Mail (LON:RMG) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
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)
0.039 = UK£312m ÷ (UK£11b – UK£3.1b) (Based on the trailing twelve months to March 2020).
Thus, Royal Mail has an ROCE of 3.9%. Ultimately, that’s a low return and it under-performs the Logistics industry average of 9.2%.
See our latest analysis for Royal Mail
In the above chart we have a 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?
On the surface, the trend of ROCE at Royal Mail doesn’t inspire confidence. Over the last five years, returns on capital have decreased to 3.9% from 13% five years ago. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line
In summary, Royal Mail is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 53% in the last five years. On the whole, we aren’t too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you’d like to know about the risks facing Royal Mail, we’ve discovered 1 warning sign that 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.
Promoted
If you decide to trade Royal Mail, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
Source link
