The Returns On Capital At Rocky Mountain Chocolate Factory (NASDAQ:RMCF) Don't Inspire Confidence
What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Rocky Mountain Chocolate Factory (NASDAQ:RMCF), the trends above didn't look too great.
What is 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. To calculate this metric for Rocky Mountain Chocolate Factory, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$3.9m ÷ (US$27m - US$6.1m) (Based on the trailing twelve months to November 2021).
Therefore, Rocky Mountain Chocolate Factory has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.4% it's much better.
Check out our latest analysis for Rocky Mountain Chocolate Factory
Historical performance is a great place to start when researching a stock so above you can see the gauge for Rocky Mountain Chocolate Factory's ROCE against it's prior returns. If you're interested in investigating Rocky Mountain Chocolate Factory's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Rocky Mountain Chocolate Factory Tell Us?
We are a bit worried about the trend of returns on capital at Rocky Mountain Chocolate Factory. Unfortunately the returns on capital have diminished from the 28% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Rocky Mountain Chocolate Factory to turn into a multi-bagger.
In Conclusion...
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 35% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Rocky Mountain Chocolate Factory does have some risks, we noticed 5 warning signs (and 1 which is concerning) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
