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. 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, we've noticed some promising trends at Reckitt Benckiser Group (LON:RKT) so let's look a bit deeper.
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 Reckitt Benckiser Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = UK£3.1b ÷ (UK£29b - UK£7.9b) (Based on the trailing twelve months to June 2022).
Thus, Reckitt Benckiser Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Household Products industry.
Above you can see how the current ROCE for Reckitt Benckiser Group 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.
So How Is Reckitt Benckiser Group's ROCE Trending?
Reckitt Benckiser Group has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 53%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Reckitt Benckiser Group appears to been achieving more with less, since the business is using 32% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
What We Can Learn From Reckitt Benckiser Group's ROCE
In a nutshell, we're pleased to see that Reckitt Benckiser Group has been able to generate higher returns from less capital. Since the stock has only returned 4.4% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
On a separate note, we've found 1 warning sign for Reckitt Benckiser Group you'll probably want to know about.
While Reckitt Benckiser Group 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.
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