Here's What To Make Of Ritchie Bros. Auctioneers' (NYSE:RBA) Decelerating Rates Of Return
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Ritchie Bros. Auctioneers' (NYSE:RBA) ROCE trend, we were pretty happy with what we saw.
Understanding Return On Capital Employed (ROCE)
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 Ritchie Bros. Auctioneers is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$291m ÷ (US$2.6b - US$717m) (Based on the trailing twelve months to June 2021).
Thus, Ritchie Bros. Auctioneers has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Commercial Services industry.
See our latest analysis for Ritchie Bros. Auctioneers
Above you can see how the current ROCE for Ritchie Bros. Auctioneers 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 Ritchie Bros. Auctioneers here for free.
How Are Returns Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 108% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Ritchie Bros. Auctioneers has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Key Takeaway
To sum it up, Ritchie Bros. Auctioneers has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 93% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
On a separate note, we've found 2 warning signs for Ritchie Bros. Auctioneers you'll probably want to know about.
While Ritchie Bros. Auctioneers isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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