Resources Connection (NASDAQ:RGP) May Have Issues Allocating Its Capital
There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Resources Connection (NASDAQ:RGP), it didn't seem to tick all of these boxes.
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. To calculate this metric for Resources Connection, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = US$36m ÷ (US$521m - US$101m) (Based on the trailing twelve months to May 2021).
Thus, Resources Connection has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Professional Services industry average of 11%.
View our latest analysis for Resources Connection
Above you can see how the current ROCE for Resources Connection 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 Resources Connection here for free.
What Does the ROCE Trend For Resources Connection Tell Us?
When we looked at the ROCE trend at Resources Connection, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.5% from 16% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
In Conclusion...
We're a bit apprehensive about Resources Connection because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 33% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
One more thing, we've spotted 2 warning signs facing Resources Connection that you might find interesting.
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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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