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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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So while Richards Packaging Income Fund (TSE:RPI.UN) has a high ROCE right now, lets see what we can decipher from how returns are changing.
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. The formula for this calculation on Richards Packaging Income Fund is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = CA$55m ÷ (CA$325m - CA$81m) (Based on the trailing twelve months to September 2023).
So, Richards Packaging Income Fund has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Packaging industry average of 11%.
Check out our latest analysis for Richards Packaging Income Fund
Above you can see how the current ROCE for Richards Packaging Income Fund compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Richards Packaging Income Fund.
How Are Returns Trending?
In terms of Richards Packaging Income Fund's historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 32%. However it looks like Richards Packaging Income Fund might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Richards Packaging Income Fund has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.