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Reynolds Consumer Products (NASDAQ:REYN) Will Be Hoping To Turn Its Returns On Capital Around

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Reynolds Consumer Products (NASDAQ:REYN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Reynolds Consumer Products:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = US$447m ÷ (US$4.8b - US$482m) (Based on the trailing twelve months to March 2022).

Therefore, Reynolds Consumer Products has an ROCE of 10%. In isolation, that's a pretty standard return but against the Household Products industry average of 16%, it's not as good.

See our latest analysis for Reynolds Consumer Products

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roce

Above you can see how the current ROCE for Reynolds Consumer Products compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

On the surface, the trend of ROCE at Reynolds Consumer Products doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Reynolds Consumer Products has decreased its current liabilities to 10% of total assets. Since the ratio used to be 61%, that's a significant reduction and it no doubt explains the drop in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Reynolds Consumer Products' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Reynolds Consumer Products. And there could be an opportunity here if other metrics look good too, because the stock has declined 15% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 3 warning signs with Reynolds Consumer Products (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While Reynolds Consumer Products isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.