When we’re researching a company, it’s sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Reunert (JSE:RLO) we aren’t filled with optimism, but let’s investigate further.

Understanding Return On Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Reunert, this is the formula:

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

0.15 = R1.2b ÷ (R12b – R4.1b) (Based on the trailing twelve months to March 2023).

Therefore, Reunert has an ROCE of 15%. By itself that’s a normal return on capital and it’s in line with the industry’s average returns of 15%.

Check out our latest analysis for Reunert

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Reunert, check out these free graphs here.

What Can We Tell From Reunert’s ROCE Trend?

There is reason to be cautious about Reunert, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 20% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it’s a mature business that hasn’t had much growth in the last five years. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Reunert becoming one if things continue as they have.

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What We Can Learn From Reunert’s ROCE

In summary, it’s unfortunate that Reunert is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 6.7% in the last five years. Regardless, we don’t like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 2 warning signs for Reunert (of which 1 is significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.