RATIONAL (ETR:RAA) Knows How To Allocate Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over RATIONAL's (ETR:RAA) trend of ROCE, we really liked what we saw.
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 RATIONAL:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = €277m ÷ (€918m - €203m) (Based on the trailing twelve months to September 2023).
Therefore, RATIONAL has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Machinery industry average of 11%.
See our latest analysis for RATIONAL
Above you can see how the current ROCE for RATIONAL compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for RATIONAL.
So How Is RATIONAL's ROCE Trending?
It's hard not to be impressed by RATIONAL's returns on capital. The company has consistently earned 39% for the last five years, and the capital employed within the business has risen 65% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If RATIONAL can keep this up, we'd be very optimistic about its future.
In Conclusion...
RATIONAL has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, over the last five years, the stock has only delivered a 34% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
One more thing, we've spotted 1 warning sign facing RATIONAL that you might find interesting.
RATIONAL is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
