RAS Technology Holdings (ASX:RTH) Could Be Struggling To Allocate Capital
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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, RAS Technology Holdings (ASX:RTH) we aren't filled with optimism, but let's investigate further.
We've discovered 2 warning signs about RAS Technology Holdings. View them for free.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on RAS Technology Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
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0.036 = AU$593k ÷ (AU$21m - AU$4.4m) (Based on the trailing twelve months to December 2024).
Thus, RAS Technology Holdings has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 16%.
Check out our latest analysis for RAS Technology Holdings
In the above chart we have measured RAS Technology Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for RAS Technology Holdings .
What The Trend Of ROCE Can Tell Us
In terms of RAS Technology Holdings' historical ROCE movements, the trend doesn't inspire confidence. About three years ago, returns on capital were 6.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect RAS Technology Holdings to turn into a multi-bagger.
The Key Takeaway
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 48% return to shareholders over the last three years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.