Richelieu Hardware (TSE:RCH) Knows How To Allocate Capital
There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Richelieu Hardware (TSE:RCH) looks attractive right now, so lets see what the trend of returns can tell us.
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. Analysts use this formula to calculate it for Richelieu Hardware:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = CA$212m ÷ (CA$1.3b - CA$311m) (Based on the trailing twelve months to May 2023).
Thus, Richelieu Hardware has an ROCE of 21%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.
Check out our latest analysis for Richelieu Hardware
In the above chart we have measured Richelieu Hardware's 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 Richelieu Hardware here for free.
So How Is Richelieu Hardware's ROCE Trending?
We'd be pretty happy with returns on capital like Richelieu Hardware. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 118% 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 Richelieu Hardware can keep this up, we'd be very optimistic about its future.
In Conclusion...
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 70% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing to note, we've identified 1 warning sign with Richelieu Hardware and understanding this should be part of your investment process.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
