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Will The ROCE Trend At RHI Magnesita (LON:RHIM) Continue?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at RHI Magnesita (LON:RHIM) and its trend of ROCE, we really liked what we saw.

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 RHI Magnesita:

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

0.11 = €261m ÷ (€3.1b - €718m) (Based on the trailing twelve months to June 2020).

Therefore, RHI Magnesita has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.3% generated by the Basic Materials industry.

View our latest analysis for RHI Magnesita

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Above you can see how the current ROCE for RHI Magnesita 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.

What The Trend Of ROCE Can Tell Us

RHI Magnesita is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The amount of capital employed has increased too, by 77%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On RHI Magnesita's ROCE

To sum it up, RHI Magnesita has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 36% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 3 warning signs facing RHI Magnesita that you might find interesting.

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

This article by Simply Wall St is general in nature. 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.

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

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