The Returns On Capital At RF Industries (NASDAQ:RFIL) Don't Inspire Confidence
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at RF Industries (NASDAQ:RFIL) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on RF Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = US$1.7m ÷ (US$78m - US$12m) (Based on the trailing twelve months to July 2023).
Therefore, RF Industries has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.
View our latest analysis for RF Industries
In the above chart we have measured RF Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering RF Industries here for free.
How Are Returns Trending?
On the surface, the trend of ROCE at RF Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.6% from 24% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
In Conclusion...
To conclude, we've found that RF Industries is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think RF Industries has the makings of a multi-bagger.
On a separate note, we've found 1 warning sign for RF Industries you'll probably want to know about.
While RF Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
